After nearly four years of bitter conflict, in 1995 the small Balkan country of Bosnia became the location for an experiment in the operation of a microcredit-driven post-war reconstruction and development program. Within a little over a decade, Bosnia became the second most microfinance ‘saturated’ country in the world, topped only by pioneering Bangladesh. As elsewhere, widespread predictions were made that poverty and under-development in Bosnia would soon be a thing of the past. The then head of Women’s World Banking, Nancy Barry, even claimed that “Any war-torn country should look to Bosnia as a role model”.
Rather than generalised progress thanks to microcredit, the Bosnian economy and its people were instead plunged into a maelstrom of quite destructive economic and social outcomes and trends. Today, popular and political support for the microcredit model has dramatically slumped throughout Bosnia. So what went so dramatically wrong?
The first problem is the overarching fact that the microcredit model per se simply does not work.
In terms of Bosnia specifically, we find many of the most familiar microcredit-driven problems. First of all, it is widely accepted that the bulk of microcredit disbursed in Bosnia actually goes into consumption spending, not to fuel enterprise development. Among other things, this has resulted in the huge problem of individual over-indebtedness coming to Bosnia. Also in very serious debt are the over 200,000 guarantors who agreed to repay the microloans taken out by friends and relatives in the event that they got into difficulty.
Thanks to these and other adverse developments, many microcredit organisations (MKOs) are in serious difficulty today, and some of the worst affected MKOs are reporting that they might have to write-off as much as 80-90 percent of their microloan portfolios. Tragi-comically, the key international donor community organisations that once worked so hard to ‘sell’ microcredit to the poor, are now supporting the establishment of a network of debt counselling agencies that advise the poor to avoid any involvement with microcredit!
Even worse, Bosnia’s economy is now effectively dominated by tiny informal enterprises all with virtually no growth or development potential. In fact, most microenterprises in Bosnia actually collapse very quickly (World Bank researchers found that up to 50 percent of microenterprises do not survive beyond their first year). Moreover, of those microenterprises surviving, often their sole impact is to reduce local prices, and so also the returns made by other equally poor micro-entrepreneurs operating in the same sector, or else put them out of business entirely. Few net job or income gains are thus realised thanks to more microcredit.
Local people often refer to these debilitating trends as the ‘Africanisation’ (in local language, ‘Africanizacija’) of their economy, meaning its transformation into a primitive economic structure where virtually the only enterprises that exist are temporary petty trade-based or service-based informal microenterprises. On such a shallow and chaotic economic foundation you simply cannot build a successful local or national economy.
It is also clear that enormous damage has been done thanks to the ongoing transformation of Bosnia’s microcredit sector into a pure business opportunity. Free market policies and extensive deregulation in Bosnia have combined to usher in quite breathtaking levels of Wall Street-style opportunism and greed in the microcredit sector. In turn, this has seriously eroded the accumulation of social capital in the community – trust, reciprocity, volunteerism, and mutual support – that was needed to promote business investment and increase economic activity. Three developments in particular are useful illustrations of what has gone seriously wrong with Bosnia’s microcredit model.
Although always publicly asserting their selfless ‘dedication to resolving poverty’, the senior managers in the main MKOs have actually been quietly upping their salaries and bonuses to almost Wall Street-style proportions. This trend reached a new peak in 2010, however, when the Bosnian Taxation Service announced in its regular bulletin that the highest paid employee in the whole of Bosnia that year was the Director of an MKO! In a country where the average monthly salary is around $600, it turned out that the Banja Luka-based MKO Mikrofin was rewarding its Director with a monthly salary amounting to 220,249 KM (around $US150,000). Even after it was reported that the high monthly salary figure for July perhaps included a one-off bonus payment, most microfinance advocates admitted to real shock at the naked profiteering involved. Others pointed out that, even after substantial government and civil society pressure on most MKOs to cut their interest rates in order to help the over-indebted poor, it was precisely because of such stratospherically high salary and bonus payments that Bosnia’s MKOs continue to charge very high effective interest rates (from 35 percent to 60 percent) to their mainly poor clients.
Consider also the large amount of donated funds given to the Bosnian people after the war to capitalise the microcredit sector. In recent years, however, the MKOs have been pressing hard to convert this initial endowment of publicly-owned assets into private assets. The ideal way to do this is to form a new private financial company to which all the original assets of the MKO can be transferred. The original MKO – now an empty shell – can then be closed down, leaving a shiny new shareholding company in its place which is largely, if not wholly, owned and controlled by the very same senior managers who came up with the idea for transformation!
To date, the government in one of the two entities that make up Bosnia – the Federation entity – has so far resisted all the pressure to allow any such initiatives, fearing that the Bosnian people would inevitably lose out. In the case of the other entity (the Republic of Serbia), however, the law allows its MKOs the freedom to facilitate just such a transformation. The one MKO that has moved in this direction is – perhaps not surprisingly – the aforementioned MKO Mikrofin. Among other things, Mikrofin used its own funds to purchase a local private bank. Alongside capital provided by its senior managers acting in a personal capacity, Mikrofin has also created an investment fund (Mikrofin Invest). Through such creative initiatives, it is feared, the original international donor funding given to Mikrofin (around €4 million) plus significant retained earnings are now in danger of being fully privatised, and thus lost to the Bosnian public.
Finally, it is also important to consider the mainly foreign-based Microfinance Investment Vehicles (MIVs) that are providing the fuel for the MKOs in the form of commercial funding. These MIVs attract a very good financial return on their investments (from 7.5 percent up to as much as 12 percent), thus providing their wealthy shareholders and investors in Western Europe a handsome and (to date anyway) a relatively risk-free return. Most of the MIVs working in Bosnia advertise that they want to make a decent return while also ‘helping the poor’.
However, it is well known that in practise almost all of the MIVs working in Bosnia – notably the European Fund for Southeast Europe (EFSE) – have been very aggressively ’pushing’ additional funding on to Bosnia’s MKOs. They do this simply in order to continue to make very handsome profits, and despite being very well aware that the level of individual over-indebtedness in Bosnia was already a major economic and social problem. Very much as on Wall Street with regard to sub-prime mortgages, the MIVs operating in Bosnia have acted quite unethically in wilfully over-extending credit to the very poor.
Some long-time microcredit supporters are now willing to concede that the microcredit model in Bosnia has turned out to be a flawed model for its post-war reconstruction.
However, the deleterious outcomes and negative trends that have emerged in Bosnian practise in recent years, and are becoming worse as we speak, confirm to us that microcredit has actually been a failed poverty reduction and local development model.
Dr Milford Bateman is a freelance consultant, Professor of Economics and the author of ‘Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism.
Dean Sinkovic is a professor and researcher.