Bosnia and Herzegovina’s economy before the war was based on heavy and military industry, and was dominated by several large state-owned conglomerates. A major part of this economy and market were destroyed during the war and the country was left with a large percentage of unemployed people and without the most basic infrastructure and services. Banks were influenced by politics and unable to finance the emerging private sector.
IDA proposed microfinancing–unheard of in Bosnia and Herzegovina until then- to support sustainable and inclusive private-sector led growth. The projects were designed to provide access to financial services to low-income clients and micro-entrepreneurs wishing to start and develop their businesses, with priority being given to demobilized soldiers, women entrepreneurs and those people displaced or disabled by war. A first project (1997-2000) kick-started the development of the microcredit sector in Bosnia and Herzegovina, and the second project (2002-2005) increased the scale, financial sustainability, and social impact of microcredit services.
About 200,000 jobs have been created and/or sustained through access to microcredit services.
Highlights:
- About 380,000 microcredits for a total of KM 1.24 billion (more than 600 million Euros) were disbursed over 10 years from the revolving microcredit fund by eight partner microcredit organizations (MCOs) contracted under the two projects.
- At the time of the project closing (June 2005), these partner MCOs were serving about 100,000 active clients (four times more than in 2002).
- 50 percent of borrowers were women. This has strengthened women’s role in the family and helped support female-headed households -- an important contribution given that the war left many households without male heads of families.
- Bosnia and Herzegovina ranked 7th in the world in terms of “access to credit” in the Doing Business 2007 survey. While this result is mainly due to successful reform of the banking sector, the microcredit industry’s contribution was also significant.
- An independent impact assessment carried out by a local research firm under the LIP II found that client businesses on average employ 2.1 persons, and that there was a very positive impact of microcredits on businesses, household income and even registration (formalization) of businesses. The survey showed that 60 percent of new clients had formalized their businesses, compared to less than 40 percent of non-clients surveyed.
- Loan terms and conditions significantly improved over time. For example: average loan term of micro-credit in the year 1999-2000 was 10 months while it was over 15 months in year 2005. Interest rates also significantly declined from close to 30 percent APR to about 15 percent APR (low inflation was maintained throughout this period and did not affect this decline).
- Performance indicators of partner MCOs were strong throughout project implementation, including portfolio at risk of less than 1 percent.
- Under the second project, partner MCOs were able to mobilize about US$50 million in commercial debt financing under regular terms from local banks and international lenders.
- An appropriate legal and regulatory framework is now in place that allows MCOs to attract equity investments in addition to donor grants, subsidized loans from donors and commercial loans which were sources of financing previously available. The project also strengthened supervision of the sector in accordance with international best practices for this type of financial intermediation.
- The cost of both projects was US$44.3 million of which IDA contributed US$27 million.
- IDA used its global expertise in microfinance to pioneer the microcredit approach in Bosnia and Herzegovina.
- IDA provided financing to eight Microcredit Organizations, invested in building local capacity in this new field and helped develop a legal and regulatory framework for microfinance so that MCOs could expand their sources of financing and the types of services they provide.
- IDA also financed a longitudinal impact assessment to assess the effectiveness of MCOs.
Italy, Japan, the Netherlands, Switzerland and the UN High Commissioner for Refugees provided co-financing for the first project.
Although IDA credits for this project have been officially closed, the revolving funds of the partner MCOs continue providing funds for micro-entrepreneurs, enabling continued income-generation as well as opening of new, or sustaining of existing jobs.
Growing interest from the commercial sector, local banks, the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), provides reasonable assurances that the microcredit industry will remain sustainable in Bosnia and Herzegovina over time. IFC has recently approved loans to two partner MCOs previously supported by IDA, with the possibility of converting these loans into equity. The IFC project is expected to reach an estimated 4,500 new micro entrepreneurs and increase employment and income generation for more than 15,000 citizens, primarily in rural areas, during the tenor of the loan.
Local Initiatives Project I (1997-2000) and II (2002-05)
Project documents I | II
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