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Proponents of microfinance hoped it would revive Bosnia's post-war economy.
Proponents of microfinance hoped it would revive Bosnia's post-war economy.

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.

13 Responses to “Bosnia’s post-war microcredit experiment: How to destroy an economy without even trying”

  1. Isa Kocher

    economics is a natural science if it is practiced that way as a science based on data. no science is natural if it is not tested against reality. neo liberal economics doesn’t bother with collecting facts because the market player is ideal. now throw in some real people into it.

  2. Isa Kocher

    everything mentioned in this article describes something contrary to microcredit as developed in bangladesh. 1. borrowers are screened by successful borrowers. 2. borrowers payback and borrowing is done from proceeds of repayments. 3. management is in the hands of borrowers. there is no professional full time salaried management. 4 loans are made for reasonably profit making projects.

    so this all has zero to do with microcredit as development. it’s same old same old exploitation of the poor. the rich squeezing the last cent out of poor people’s lives. like pay day lenders.

    it doesn’t take a rocket scientist to figure out consumer loans to people without equity results in further impoverishment.

    this is all so gdmf bogus bs. dumping on the poor and liberals. again.

    of course the poor can’t sustain profit making finance. there is no profit in poverty.

  3. Syed Imtiaz Ali

    Microcredit never did promise a panacea and that it could elevate the poor from their poverty.

    It is a temporary relief…if one could say, to overcome a ‘paralysed’ state to become self-reliant with little working capital. Basically it is for the destitute.

    This approach and practice perhaps have never been theorised or included in text books by Western authors. Hence they cannot see the rationale in the acceptability and flourishing of this approach, blooming into a stream and discipline to be taken seriously, eventually taken note by the Nobel Committee.

    MC also gives the opportunity of handling money and for some to succeed in becoming an entrepreneur.

    So, if that can be catalyzed where is the problem? Why is some quarters, after its decades old success (limited may be yet not to be abandoned), wary about it? If this ‘malformed’ economics can uplift many out of poverty, so be it! Let Micro credit flourish to benefit the poorest, and let the anti MCs be left alone!

    MC could be one single force able to alleviate the pangs of poverty. Because poverty breeds illiteracy, drug-addicts, anti-socials, robbers, hired goons and the whole lot social decay attributes.

    Please accept an exception and re-model MC if need be, let millions benefit. There will be, and there always have been some opposition to any initiative; it is a universal character for some disgruntled lot. The fact remains that as a result of different social and economic trends and character MC will not be equally successful in all applied areas, Bosnia or XYZ, that do not ensure proper education to manage themselves and their little possessions.

  4. G Sarwar

    The best economics university in the world, University of Chicago not only praised the model, but also highly recommends for all using hard facts. The leftist economists with a semi literate educational background who hates the capitalist world violently oppose this model. The reason behind Bosnia’s downfall is not definitive but still subjective analysis, given it’s a war torn country.

    I am an economist myself and I find the microcredit very adjacent in the capitalist system as it provides a chance for the poor and needy (who would go unheard of in their model) unlike socialists and communists who make everyone poor equally.

    • Arslan

      “The best economics university….semi literate educational background”…lol.

      First of all, economics is not a natural science, and therefore definitive terms of “best” and “worst” should be left out.

      Secondly, the Chicago school is not only loathed by leftists, but by Keynesians as well. Milton Friedman’s puritanical neo-liberalism wrecked havoc in Chile, and this is a fact only disputed by disillusioned fanatics of the free-market system. The prescription given to Chile’s fascist dictator Augusto Pinochet by the Chicago boys (a group of Chilean economists trained in your “best university”) opened the country up to liberal economic reforms, and thus produced increased income inequality, massive unemployment, and de-industrialisation. So, the same university rooting for micro-credit only furthers the argument that micro-credit is not for the poor… it is for the elite.

      Thirdly, it’s interesting to note that you have not given any arguments worthy of notice in favour of microcredit, the best you could come up with is slandering those on the left as “semi-literate”. A very old trick, trying to discredit those on the opposite side, in a desperate attempt to win an argument.

      And lastly, it’s not only people on the Left that oppose micro-credit (I’m not a socialist/communist), rather it’s people all around the political spectrum (except for classical liberals) who have rationally/empirically concluded that microcredit is ineffective (at best) and counter-productive (at worst.)

      • G.Sarwar

        Augusto Pinochet was a dictator and no one has disputed that fact. So, I am assuming you are a fan of Allende, who has literally bankrupted the country. It was Freidman’s theory which sustained till now in Chile. It was the free market which eventually led to democracy. Chile is one of the only countries on the South which is a middle income country, benefited solely through free market. Get your history right!

    • Rafat Mazumder

      Are you an economist? Do you know what the economy is? Where do you live? In Bangladesh or America or anywhere else?

      Do you know Dr. Muhammad Yunus? A Bangladeshi Professor of Economy, a Nobel Prize winner! He won Nobel Prize not for any revelation economic theory! He won the Nobel Peace Prize! Do you know why he won the Peace Prize?

      If you know then please answer the question, because it is very important to me to understand him. Millions of people here in Bangladesh and all over the world are eagerly waiting to understand the ground for Yunus to get the Nobel Peace Prize.

      If you know the grounds of his Peace Prize Win please answer as early as possible.

      • G.Sarwar

        The reasoning behind his Nobel peace prize is very simple: introducing a tool which will help alleviate poverty. There are many factors which contribute towards poverty especially in Bangladesh where the government is highly and severely corrupt with demagogues ruling and dictating policies. Even through the worst of the situation, we still manage to get a 7percent growth thanks to private investments and off course the Grameen model which few people can’t seem to grasp.

        There is a very detailed reply to Tom Heinamen’s documentary where he criticised Dr. Yunus, if you care to look it up. The idea behind Nobel peace prize in general is very disputed. War criminals like Henry Kissinger has been awarded the peace prize. Yunus’ contribution is of a higher stature.

      • Rafat Mazumder

        At what extent poverty has been alleviated from Bangladesh by using microcredit as a tool which helped to alleviate poverty from Bangladesh? In which way peace has been brought in Bangladesh or elsewhere in the world by giving poor people a tiny loan? What are other factors which contribute towards poverty especially in Bangladesh?

        Do you think Muhammad Yunus and the Grameen (with like minded institutions) need a mechanism or the state power to control government of Bangladesh which is highly and severely corrupt with demagogues ruling and dictating policies?

      • Rafat Mazumder

        Dear honourable editor,
        Could you please rectify my last sentence by adding the sentence pasted below?

        “Do you think now Muhammad Yunus and the Grameen (with like minded institutions) need a mechanism or the state power to steer the government of Bangladesh (which is highly and severely corrupt with demagogues ruling and dictating policies) to send poverty to the museum as per Yunus’ claim?”

  5. Hafiz Al Asad Talha

    Over the last one year I’ve noticed in the region of Dinajpur in Northern Bangladesh that a fad has grown among the mass that one ought to get a loan from such microcredit organisations and repaying instalments are something of a trend and fashion and more like a show off.

    I have also witnessed how some small retailers failing to pay instalments are harassed verbally, physically, sometimes their assets being confiscated and at times cops are appointed to recover instalments. Many resort to taking further loans from second and third NGOs to pay off the first and second loans. This could eventually bring havoc of its own kind, perhaps something like that of Bosnia?

  6. Arslan

    Another good article I must say. The only reason the whole idea of microcredit is so passionately promoted by many Western academics and politicians is so that the financial sector can make even more profits.

    Previously, the capitalist world exploited the poor by using them as cheap labour… now, in addition to that, it has found a new way to make money off the underprivileged in the name of “poverty reduction”. And yet, some people continue to support this idea, almost blindly.

    Poverty is a systemic problem, it is a direct result of the lack of a distributional mechanism within capitalism, which ensures that the wealth is concentrated in a few hands. All patch-work pseudo-solutions like microcredit will only make things worse, because they give the illusion that this system can work.

  7. Ron

    This is a laugh, really! Dr Bateman, better try to find out why the economic theories from last century will not work in this one! 🙂

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