Bosnia: Escaping the Debt Trap
Washington DC, September, 13 2011 -
Delinquency rates in Bosnia (as elsewhere) have risen in tandem with the global economic slowdown. As in other overheated markets, such as Nicaragua, Morocco, and Pakistan, Bosnia’s credit bubble is not the fault of any single culprit.
Rather, a combination of factors such as the lenders distributing unwise loans, lack of financial understanding on the borrower’s part, ineffective regulations, and a deteriorating macroeconomy, have each played a part.
Maja (not her real name), a divorced mother of one child, had been running a small retail clothing business in the Bosnian city of Tuzla and was managing to make ends meet. But the recession gradually took its toll, and by March 2010, Maja was forced to shut her business down. Her income dropped to zero -- but she still had three outstanding loans with combined monthly payments of 350 Bosnian marks (USD $258). Maja turned to the new Center for Financial and Credit Counseling (known by its Bosnian acronym CFKS) whose staff visited her at home to gain a complete picture of her financial and life circumstances. CFKS created a Proposal for Debt Repayment which was presented to, and accepted by, her creditors.
The Credit Bubble
Maja’s story is not unusual. Delinquency rates in Bosnia (as elsewhere) have risen in tandem with the global economic slowdown. As in other overheated markets, such as Nicaragua, Morocco, and Pakistan, Bosnia’s credit bubble is not the fault of any single culprit. Rather, a combination of factors such as the lenders distributing unwise loans, lack of financial understanding on the borrower’s part, ineffective regulations, and a deteriorating macroeconomy, have each played a part.
According to CFKS estimates regarding loans in Bosnia, delinquent loans more than 30 days past due rose from 3.5 percent in 2008 to 10 percent by the end of 2009. And because Bosnia only recently developed an effective national credit registry, there is also strong evidence of significant client overlap across institutions (20 to 40 percent, according to the initial feasibility study conducted prior to CFKS launch), with many customers borrowing from two or three lenders at a time.
A City Responds
CFKS opened its doors in Tuzla in 2010 with start-up funding from DFID. In designing their start-up plans, CFKS drew in part upon the operating model of the non-profit debt counseling services that have been operating in the United Kingdom for more than 50 years. But they were surprised not to find examples of large-scale counseling initiatives focused on microfinance clients specifically.
Adnan Mesic, chief executive officer of CFKS since its launch, says “I think a lot of the emphasis on financial sector development has focused on institutions and markets, and left the actual client with no support. Initiatives like CFKS represent the next step in maturation. They help to even the scales.”
To date, 388 individuals with a combined level of indebtedness of over US$4.7 million (average debt of over $12,000 /person), have reached out for help from the three-person staff. While results vary per client, overall statistics are promising: in 16 percent of the cases, CFKS crafted a debt relief and restructuring plan that was accepted by both the client and all his/her creditors; and in 21percent of cases, CFKS provided training that enabled the client to resolve the situation directly.
However, 11 percent of CFKS proposals for restructuring were rejected by creditors and 26 percent involved the client not completing their advice service with CFKS (e.g., not returning for follow-up appointments). Mesic says, “I used to believe that if we do not get a restructuring deal done for a person, then we have failed.” But results of a recent CFKS survey have changed his thinking.
The survey, which questioned people who came to CFKS for debt relief help but ultimately left without a mediation agreement, found that 20 percent of them reported an improved relationship with their financial institution. Furthermore, a similar percentage of respondents reported that the motivational support from the CFKS staff had inspired them to take some proactive measures to address their indebtedness, and that their personal financial management skills had improved.
The Importance of Financial Education
Another CFKS core service is financial education and trainings have been delivered to more than 680 participants using custom-designed curricula. Topics covered include household budgeting, the differences between types of financial institutions (e.g., microfinance institutions compared to banks), features of different savings and loan products. They are now rolling out financial literacy workshops for high school students which will be conducted by volunteers from local universities. “The importance of savings – that it is better to start small, early, than to make a huge last-minute effort – is a particular focus for our younger audiences,” says Mesic.
A Cultural Shift
Mesic stresses the notion of counseling in general represents a cultural shift in Bosnia. Men, especially, are inclined to believe that they should be able to solve problems on their own. Sixty percent of CFKS’s total clientele is female, but 80 percent of the mediation agreements involve women borrowers who, Mesic says, “walk through the door more ready to walk out with an agreement. Men want to get input and then go home and figure it out by themselves.”
Mesic makes a point of “promoting a culture where everyone stays focused on the solution.” He says, “Of course, it is important for the industry to understand the big picture, but our client is not the industry. It’s individual people who are each in a tough situation. Our job is to be the trusted mediator, keep everyone’s minds on ‘now what?’, and get them to make the deal they can make now.”
CFKS is currently in the process of expanding throughout the country and is obtaining a license to operate on a national level. Mesic continues to refine CFKS’ model and hopes to eventually replicate it globally. And because CFKS envisions remaining free-to-user, its ability to grow will depend upon ongoing support. In addition to DFID, and IFC which has provided financing and continues to support CFKS with intensive advisory services, CFKS donors include Oikocredit European Fund for Southeast Europe, responsAbility, Blue Orchard, DWM, and MFIs Mi Bospo, Mikrofin, EKI and Partner.
The response from policymakers has been “pretty amazing,” according to Mesic. “That the governor of the central bank would write a letter of endorsement about a start-up NGO in Tuzla – I think it speaks volumes about what we have accomplished, even though most days all I can see is the work still ahead.”