|Proponents of microfinance hoped it would revive Bosnia's post-war economy [GALLO/GETTY]
A market-led lending scheme some hoped would be the driving force behind economic revival in Bosnia after the civil war ended in 1995 is facing meltdown.
Its harshest critics say the scheme is not only in crisis, but that it has done more economic harm than good.
Microfinance, where modest loans are distributed to tiny start-ups, is seen by its supporters as a way to foster profitable economic activity from the grass-roots level.
This idea has steadily won favour among policy-makers and socially-minded investors around the world since it was first pioneered in Bangladesh in the 1980s.
All was seemingly going to plan in Bosnia until recently.
Microfinance loan portfolios grew at 80 per cent plus a year for the five years leading up to 2008 and fewer than 2 per cent of loans were more than a month in arrears. By the end of 2008 there were 390,000 loans on the books, together totalling over BAM 1 billion ($770m).
The original goal of the sector was development, but the profit motive fuelled the boom.
From within the country microfinance lenders battled it out for market share and a growing band of socially-minded foreign investors started taking an interest in the sector.
For many with money to invest it seemed to offer a rare blend of reliable financial return and the knowledge that the money invested was improving the lot of impoverished loan recipients.
Microfinance is almost universally associated with high interest rates, sometimes as high as 30 per cent a year, and high levels of repayment, adding up to the potential to make large profits.
Poor people, microfinance's main targets, are unusually averse to losing face by falling behind, even if their business venture is failing to deliver a reasonable return. Friends and family are often asked to act as guarantors for borrowers without any collateral or steady income.
Also stoking the market in Bosnia was the prospect, as yet unrealised because of legal deadlock, that microfinance lenders could turn themselves from philanthropic ventures into commercial ones. Many executives hoped they might win a stake in a for-profit business.
"The people who worked there saw their own 'main chance' and became less and less concerned with development," says Milford Bateman, a consultant.
"They had done a lot of good, but they totally went away from their development mission," says Selma Cizmic of Mikro "LIDER", a non-profit microfinance organisation.
Masquerading as microfinance
In pursuit of commercial scale and personal gain, microfinance lenders issued more loans than ever, expanding their loan book and earning the loan officer involved a personal commission.
These loans were increasingly spent by borrowers on consumer goods rather than the modest business assets for which they were intended. Rather than equip a hairdresser, buy a van or a cow, they now more often than not went on weddings, cars or TVs.
"The clients were aware that there are many microfinance lenders offering loans and wherever they could go they could get it. They were attracted by the possibilities and rushed into it without thinking," says Cizmic.
From the profit hungry lender's point of view the motive is simple. "With consumer loans you can charge higher interest and the maturity rate is generally shorter."
Exactly how many consumer loans there are masquerading as microfinance is uncertain.
"A lot of institutions will deny it and say that they visit the house and verify the use to which a loan has been put," says Anne-Lucie Lafourcade, an analyst at BlueOrchard Finance, which has financed microfinance lenders in Bosnia.
It is laughable to imagine microfinance lenders ever paid such close attention to the destination of the loans, says Bateman.
"When you are disbursing 6,000 loans a month you can maybe visit 20. You take them at their word. The important thing is repayment. You don't care what they spend the money on."
Cizmic says her organisation tries to find out where around 60 per cent of loans are ultimately spent, but she agrees that it is often impossible to be sure and that other lenders were less scrupulous.
Bursting the bubble
What is certain is that this year the wheels have fallen off.
"It wasn't sustainable: obviously the bubble had to burst and it has," says Lafourcade.
Local earnings and remittances from crisis-hit Bosnian relatives living abroad have dwindled, causing the percentage of repayments coming in over a month late to increase to around 10 per cent. For some lenders it is higher.
For much of the period there had been no functional credit bureau, which has added to the problem of preventing over-indebtedness. Even now data is shaky.
Anecdotal evidence suggests, however, that it is common for people to have four or five outstanding loans, including some taken out with commercial banks which also moved into making microfinance loans.
A new bureau was set up this summer and most microfinance lenders are taking part.
"Before that we were basically blind and didn't know what was happening. There are still a couple of microfinance lenders which are not using the credit bureau, but you always have some players who go it alone in a market," says Cizmic.
With many loan recipients struggling, thousands who acted as guarantors are now being asked to stand by their commitment to family, friends and sometimes unwittingly generous acquaintances.
Many failed to realise what they were signing up to, having had scarcely any financial experience under the communist system from before the war, says Bateman. "They thought it was a joke."
Neoliberal economic ethos
For its proponents microfinance offered an efficient and profitable way to foster entrepreneurship from the ground up, without the need for heavy-handed economic intervention. But the idea was simply born of a triumphalist neoliberal economic ethos that emerged in the years that immediately followed the collapse of the Berlin Wall in 1989, says Bateman.
"Supporters of microfinance had a great belief in the spontaneity of market forces, even though it hadn't worked in Latin America or anywhere else. In doing so they ensured most of the money went on tiny little businesses which of course never had a chance to survive," says Bateman.
In the event it has led, he says, to the "infantilisation" of an economy which had previously boasted some world-beating companies.
The Bosnian microfinance industry's most ardent backers immediately after the Dayton Accord secured peace at the end of 1995 were the World Bank and USAID, America's international development agency, according to Bateman, who worked in the country at the time. The UK's Department for International Development was also enthusiastic about the idea, he says.
The eagerness to finance really micro-micro-businesses crowded out even only slightly larger concerns.
Someone told Bateman during this period that he wanted to raise about $70,000 to expand his farm in the late 1990s. "I told him to forget it," he says.
Would-be entrepreneurs who had worked in Bosnia's pre-war industrial sector fared little better.
"All they were offered was microfinance at 35 per cent a year, repayable within one year," says Bateman. "You can't set up a business with three employees with that kind of financial offer. It doesn't make sense."
Learning from experience
As for the immediate future, Lafourcade says: "Microfinance institutions have become extremely conservative over the last year and are not projecting growth of more than five per cent for 2010. A lot of them have reduced the size of their portfolio by 25 per cent since 2008. They have really learnt their lessons."
Long-overdue consolidation will now come, she says. "In the future I can only see five or six microfinance lending institutions leading the sector."
Bateman hopes that the current crisis might convince microfinance lenders to move into lending rather more substantial sums to slightly bigger businesses with more chance of survival. Much can be learned from the successful small business focused post-war reconstruction efforts of northern Italy and South Korea, he says.
In the meantime the European Investment Bank, the investment arm of the EU, last month signed off a loan for $110m to help prop up the industry.
"They are desperately trying to keep these microfinance lenders afloat. It would be a major embarrassment to the World Bank and USAID if these things were to fall now," says Bateman, although he says two or three will.
Cizmic is concerned that the injection of new funds might make matters worse and says the meltdown is ongoing although lenders are now getting more of a grip on their overdue loans.
Bosnians too seem to have learnt from the experience. "People are conscious of the problems that are happening in the market and they are thinking more deeply about whether or not to take a loan."
Cizmic says: "I hope microfinance lenders will get back to the original purpose of microfinance and will stop being too much into it for profit."