Responsible Finance Approach, ECA A2F

Lessons learned in Bosnia and Herzegovina

Nataša Goronja

The Challenge in Bosnia and Herzegovina

•Poor image of microfinance sector in the country – negative press due to over-indebtedness

•Financial crisis - in BiH and many other countries, both the banking and the MFI sector are affected

•Rising NPL levels – in BiH, PAR30 for the microfinance industry is back to around 3%, but in some MCOs still much higher

•Portfolio decrease – 40% lower, as compared to ‘08

Historical Overview of BiH Microfinance

The context – BiH had nothing (1996)

• BiH had just finished the civil war

• The entire financial sector was destroyed

• Livelihoods lost, capital wiped out

• A new approach was required fast

• Microfinance was still new, but looked very promising and focused on the poor

Microfinance looked promising (1996/7)

• Citizens’ Organizations (COs, or NGOs) vehicles to establish MFIs

• Grants and technical assistance provided, collaboration with international NGOs in some cases

• Competition encouraged, assuming a great number would go out of business in 5 years

The results, at first, far exceeded expectations (2006)

• Total portfolio volume reached USD 500 million• BiH top second destination for MIVs in 2008• Globally, BiH was considered a model success story for MF• There were 60 players in the microfinance sector in total. However, the top 8

largest players already dominated 80% of the market in terms of the # of clients.

MFI Portfolio, PAR 30 and Total Equity

What Do We Mean by Over-indebtedness?

•Refers to the risk faced by credit customers of taking on levels of debt that may be greater than they can manage, or that cause undue sacrifices to repay

•Can result from a range of causes, including personal errors in estimating levels of manageable debt, changes in income, unforeseen circumstances

•Six over-indebtedness proxies: negative impact, default and arrears, debt ratios, multiple borrowing, borrower struggle and sacrifice, and composite indicators

from CGAP IFC Credit Reporting at the Base of the Pyramid

How Do We Measure Over-indebtedness?

• Financial (objective) and

• Risk vulnerability (subjective) dimension

S

u

b

j

e

c

t

i

v

e

Objective (loan repayment to income)

Risk Vulnerability

Risk Segmentation of BiH Debtors - 2011

Risk Segmentation of Debtors - 2011

Increasing Cost of Living : 2010 - 2012

Multiple Loans : 2010 - 2012

Microfinance in BiH Today

262 356 active loans

107 000 number of clients being served by both MFIs and banks

Late payments 9%

Utility delinquencies 21%

Affordable 14%

IFC Approach

Development of non-profit debt counseling in the country, partnership with other funders

Debt Advice Center•Mediation between clients and lenders in cases of over-indebtedness•Client counseling•Financial literacy training, adapted approaches for youth and adults•Accent on responsible personal finance

Increased transparency in consumer protection for microfinance sector, partnership with SMART Campaign

•Institutions with prudent consumer protection will be distinguishable on the market, preferred by clients and investors

•MFIs with less satisfactory results will have an opportunity to improve over time•Relevant tools and advisory services will be provided•IFC as an investor has endorsed the SMART Campaign as well as other DFIs and MIVs

The Opportunity

Reinforcement of credit repayment culture

Recovery of overdue payments

Reduction of legal costs

Increased public confidence

RESULTS: Counseling (DAC) – 1000 clients served to date

Standardized approaches for client segmentation, and recommendations for debt repayment

• Adaptation of the counseling procedure into legal recovery

• Part of ECDN, European Consumer Debt Network of debt counseling centers in the EU

RESULTS: 2500+ individuals trained

Financial literacy (DAC) –

•Adapted for youth and taught in schools during regular hours by trained trainers who are university students, with permission from Ministry of Education

•Separate modules for teaching adults using interactive adult learning

•Outreach achieved through companies, local communities and schools

RESULTS: Consumer Protection Certification

•IFC pilot testing the ACCION SMART tool, using trained raters

•Re-certification within a 12-month period

•Training and tools provided as follow up, in order to improve MFI orientation to consumer protection

Thank you!