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A scheme to help the poor leads to runaway lending, leaving many people drowning in debt.
Munira Babic, who owns a small souvenir shop in Sarajevo, has been hard hit by the recession. She is one of many small entrepreneurs whose businesses have survived thanks to microcredit loans that have helped open and sustain over 100,000 jobs. Now, rising debt has jeopordized Bosnia's microfinance industry. (Photo by Danilo Krstanovic/Reuters)
GRAZ, AUSTRIA — Adnan Mesic recently opened Bosnia’s first debt advice center, in the north-eastern town of Tuzla. Unfortunately, business is booming.
Not long ago, Bosnia was a poster child for the benefits of microfinance — the movement that seeks to alleviate poverty by loaning money to small, or "micro," businesses in the developing world. Its potential has gained almost universal acceptance in recent years, even garnering the 2006 Nobel Peace Prize for microfinance pioneer Muhammad Yunus, for his work in Bangladesh in the 1980s.
Now, it appears that micro-lending may have caused more harm then benefit, fueling an unsustainable consumer borrowing bonanza.
"There is no consensus on the extent of people's debt, but perhaps one in ten people of working age have taken on more debt than they can handle," says Mesic. "At its extreme an individual's debt can be as high as $70,000." Many people in Bosnia have monthly incomes of under $300.
When the Dayton Accord ended Bosnia’s civil war in 1995, institutions such as the World Bank, USAID and the UK's Department for International Development backed microfinance to get funding directly to grass roots entrepreneurs.
For a while, everything seemed to be going rather well. "Until mid-2008 Bosnia was hailed as quite a successful example," says Sandra Hamilton, head of microfinance at Fitch Ratings. Hamilton said Bosnia’s microfinance operations were considered "very efficient" compared with those elsewhere in the world. Lenders kept their costs down and the proportion of repayments coming in more than 30 days late remained consistently below one percent, despite lending growth rates topping 80 percent per year.
By the end of 2008 there were about 390,000 microfinance loans on the books in Bosnia, totalling over 1 billion Bosnian marka ($770 million). But by that point, things had already started to go wrong. The proportion of delinquent microfinance debt has now multiplied tenfold, to about one in ten.
"The situation with regard to over-indebtedness amongst microfinance borrowers is quite serious," says Hamilton.
The economic crisis played an important part in triggering the credit crisis, according to Mesic. Many households depend on remittances from family members living abroad, who often work in modest, casual jobs, which were the first to go when the recession hit.
Selma Cizmic of Mikro LIDER, a Bosnian non-profit microfinance organization, points to another factor in what she describes as Bosnia's microfinance sector "meltdown" — the majority of the loans were not actually used to set up businesses, and therefore didn’t generate the income that might help repay them. Cizmic estimates as much as 60 percent of the money lent in the name of microfinance went to buy consumer goods rather than to securing the means to earn money — a cow, the lease of a store, or a van to import goods available more cheaply over the border.
Others say the root cause of the crisis is that microfinance companies simply lent people too much money.
"We saw the impact of very exuberant client acquisition and loan growth of microfinance institutions subsequently reflected in a growth of arrearages, which had nothing to do with global markets. It had to do with the pace of growth and the impact of over-lending," says Robert Annibale, head of microfinance at Citigroup, which raises money to fund the microfinance sector.
What then inspired this level of over-lending? Some say microfinance lenders were driven by the possibility that, with sufficient scale, they might be able to transform their non-profit organisations into for-profit ones.
Annibale sees the basic lack of information as the problem. One challenge for rapid growth, he says, is that institutions lack a comprehensive credit bureau, to ensure that borrows don’t get overextended, “especially in communities where there are multiple lenders.”
Bosnia had no central credit bureau until 2009. The country's 26 microfinance lenders were unable to check how much debt a loan applicant already had elsewhere. And commercial banks, which had moved into microfinance-size loans, could not tell how much microfinance debt a borrower had accumulated.
"We were basically blind and didn't know what was happening," says Mikro LIDER’s Cizmic. Even now, microfinance institutions are not obliged to report to the bureau, making it impossible to determine the full extent of borrowing from multiple lenders.
Over-extension is one of the more typical problems faced by clients at the new debt advice center in Tuzla. "Everyone has a different set of problems and a different path which led them here,” says Mesic. “Among the most common, though, is having a large amount of debt spread across two or more lending institutions.”
Many of the center’s clients are also burdened by their obligations as guarantors. People are being asked to pay back loans for friends, family and sometimes mere acquaintances, having signed up to be their guarantors. Many did not anticipate this outcome when they agreed to guarantee someone else’s loan. But there is little they can do.
Guarantors cannot even claim bankruptcy under the Bosnian system, according to Mesic. “They have to go to the court and potentially have their property seized, depending on what the court decides."
Mesic believes consumer education is the best defence against the kind of crisis now facing Bosnian borrowers. He is hopeful another debt advice center might open in the capital, Sarajevo, by the end of next year.
"Lending on today's scale did not even exist in Bosnia fifteen years ago, and not much has been done to educate the population properly about the financial products that are now available," says Mesic. "With a bad loan no one wins."