PAPER WRAP-UP: Bosnia and Herzegovina Microfinance Analysis and Benchmarking Report, 2008, by the Association of Microfinance Institutions in Bosnia and Herzegovina (AMFI), and Microfinance Information Exchange (MIX)

Published by the Association of Microfinance Institutions in Bosnia and Herzegovina (AMFI), and Microfinance Information Exchange (MIX), January 2009, available at:

http://www.microfinancegateway.org/files/55357_file_08.pdf

“Bosnia and Herzegovina (BiH) Microfinance Analysis and Benchmarking Report, 2008,” analyzes the development of the microfinance industry in BiH with a focus on key growth trends for the last four years (2004 to 2007), legislative changes of 2007, funding flows and structure, and performance of microfinance institutions (MFIs) as of 2007. The 14 page report is based on data submitted from 12 large Bosnian MFIs that are members of (AMFI). The report states that the 12 large Bosnian MFIs comprise 98 percent of the microfinance portfolio in the country. The report does not cite a source for the estimate of total market size. It is important to note that five microcredit organizations from BiH have been awarded the CGAP Financial Transparency Award in 2006. Only 20 MFI institutions worldwide have received this honor in 2006. (p1).

Macroeconomic and Legislative Environment

While 2008 was showing a significant slowdown of the economy, 2007 was a year of strong economic growth in BiH. There was a 30 percent increase in intermediary products and import of capital year over year (2006 to 2007). Presently, there are two political entities which represent a lower level of governance in the state of BiH: The Federation of BiH and the Republic of Srpska. Consumption, “financed by large increases in pay coupled with a higher pensions paid and growth of consumer loans” increased by 18 percent in the Federation and 12.5 percent in the Republic of Srpska (p 2). Inflation has increased to higher levels during the Q4 2007 (fourth quarter) with October (2.1 percent), and November and December (1.1 percent). It is important to note that the local currency is pegged to the euro at a ratio of 2:1 (p1).

In both entities (the Federation and Republic of Srpska) a new microfinance law was adopted in 2006. The law provided conditions for transformation of any microcredit organization (MCOs) into non-profit microcredit foundations (MCF) or for profit microcredit companies (MCCs). The purpose of the law was to provide greater oversight due to the growth and “sophistication of the sector within BiH”. Most importantly the commercialization of MCCs allows equity investors play a greater role.

Microcredit organizations would need to first transform into foundations in the Federation and have the option of choosing to become for-profit MCCs. Capital requirements are set at a minimum of 25,000 EUR (roughly 32,100 USD) with a maximum loan amount of 5,000 EUR (over 6,400 USD). Afterwards, MFIs have the option of obtaining an MCC status that will enable institutions to open their capital structure to investors. Capital requirements for MCCs are set at a minimum of 250,000 EUR (roughly 321,000 USD) with a maximum loan amount of 25,000 EUR (roughly 32,100 USD) (p2). Under the Federation and Republic of Srpska, MFIs were subject to the same capital and loan requirements with for-profit entities (MCCs) being subject to taxation. Neither MCFs nor MCCs in the Republic of Srpska are allowed to take deposits (p2).

Outreach and Scale of Bosnian MFIs

More than half of the top twelve MFIs grew by more than 50 percent in 2007 despite heavy competition from commercial banks. The top five MFIs, based on percentage growth in gross loan portfolio (GLP), were as follows: LOKmicro (191 percent), Prizma (133 percent), Mikrofin (123 percent), Eki (102 percent), and Partner (99 percent). Interestingly enough, LOKmicro was the most highly levered MFI with the debt to equity ratio (D/E) of 8.8. It is important to note that almost half of the MFIs sampled had a (D/E) over 4.0: LOK micro (8.8), Prizma (2.1), Mikrofin (3.8), Eki (4.2), Partner (4.1) and Sinergija (4.7). Active borrowers increased by 54 percent while GLP increased by 85 percent in local currency terms in 2007 (p3).

As of September 30, 2008, total clients increased 30 percent from year end 2007 levels. Gross loan portfolio (GLP) was estimated at USD 817 million. These findings are based on quarterly data (from its 12 MFI members) collected by AMFI. Note this is a 27 percent increase in local currency terms. Bosnian MFIs grew in scale, driven by large loan balances that grew to 2,087 USD, representing a 31 percent increase. However, the report clearly illustrates that the “median average loan balance as a percentage of gross national income per capita (GNI) had slightly decreased by 4 percent” at 54 percent. Thus, borrowers in the BiH region were slightly less leveraged (p3).

Bosnian MFIs offered the lowest average loan balances per borrower in comparison to their regional peers such as the Balkans and Kosovo region. For example, the average 2007 loan balance per borrower in the Balkans and Kosovo (BiH peers) was 3,100 USD and 2,900 USD respectively, while for the (BiH) region it was 2,000 USD. The reports notes that this could be due to the fact that sustainable MFIs operate in lower level regions such as Central Asia where balances are typically lower (Figure 3, p4).

The loan portfolio by sector for MFIs illustrate that they operate virtually in the same number of cities between the Republic of Srpska (28 MFIs) and the Federation (24 MFIs). The majority of loans that consisted of the top three sectors were agriculture (37 percent), service (25 percent) and trade (20 percent). Herzegovina had a 5 percent share of the total portfolio of Bosnian MFIs and suggest that MFIs have yet to fully expand there services.

Funding Flows in BiH

Initially a majority of funding to MFIs in BiH derived from donations but later expanded to attract commercial sources. Their capital to asset structure from 2004 to 2007 expanded as their commercial funding liabilities ratio (borrowings at commercial interest rate/average GLP) grew to 73 percent in 2007. Further, the report states that Bosnian MFIs became highly leveraged with debt to equity doubling close to 4 times in 2007 (p5). This assessment is based among peers (similar in size and market outreach) from Central Asia, Eastern Europe, Kosovo, and the Balkans. The composition change shifted to foreign lenders in 2007 by more than 70 percent. Also, the report’s findings illustrated that loans from microfinance investment vehicles (MIVs) increased by 280 percent in 2007. Funding from development financial institutions (DFIs) almost doubled by 2007. As foreign lending increase the share of subsidized funding decreased significantly to 12 percent in 2007 (p6).

Performance of Bosnian Microfinance Institutions and Risk Management

Adjusted return on equity (RoE) increased by 2.6 percent to 19.6 percent in 2007. The research suggests that this increase was due to a significant reduction in total expenses from 20.2 to 17.7 percent by 2007; mostly achieved by a reduction in operating expenses from 13 to 10 percent. A regional comparison of Bosnian MFIs with that of its peers illustrate they have the lowest cost structure coupled with the highest margins. Improvements in efficiency and productivity in terms of their loan officers to borrower ratio have been instrumental in the success. Borrowers (as a ratio to loan officers) increased by 14 percent. Staff levels per borrower remained the same in 2007. Most notably operating expenses as a percentage of GLP dropped roughly by 11 percent (p7). The risk profile of Bosnia MFIs have been solid with (PAR>30 days) performance from 2005 to 2008 of less than 2 percent.

Conclusion

While there has been an upward trend of portfolio risk in 2009 regarding credit quality in this global credit crisis and loan repayment, Bosnian MFIs are prepared for the economic challenges that lie ahead. With the repercussion of the global financial crisis in full swing, Bosnian MFIs may reach a point of saturation as MFIs serve roughly 49 percent of the region. This a stark comparison when further analysis clearly illustrates that MFIs represent only 18 percent of their respective target market in the entire Balkan region. This research suggests that the cost of funding is expected to increase, in the form of foreign debt financing. However, Bosnian MFIs are prepared to embrace these challenges as product innovation and branch network expansion continues.

By Zoran Stanisljevic

Additional Resources:

“Bosnia and Herzegovina Microfinance Analysis and Benchmarking Report, 2008,” published by AMFI and MIX: January 2009.

Association of Microfinance Institutions in Bosnia and Herzegovina (AMFI): Home

Microfinance Information Exchange (MIX): Home