Improving Microfinance Regulations in Bosnia

Improving Microfinance Regulations in Bosnia
By Dzavid Sejfovic, General Manager,  LIDER MicroCredit Foundation

Dženana Vračo has been a loyal business client of LIDER Microcredit Foundation since 2008. Eight years earlier, she started a small grocery store in her unfinished home in the suburbs of Visoko.  Struggling to make ends meet for her family of four, and facing fierce competition from large supermarket chains, Dženana took the risk and with her first loan from LIDER, expanded her business into roasting, grinding, and selling her own brand of Bosnian coffee. Dženana’s store quickly became known as the best place to get freshly roasted coffee in the region. Since that early success, Dženana continued to partner with LIDER and her business quickly grew from supplying about 30 local stores with her coffee, to about 300 clients located in 16 cities, including larger supermarkets. Although her store started as small family-owned business, Dženana now has 3 permanent employees as well as seasonal workers during peak times.  Dženana’s next plan is to replace her old coffee-roaster with a new machine that will double her daily output, purchase a new packing machine that will significantly improve productivity, and add two new employees to help with production and sales. 
Despite Dženana’s long tenure as a loyal client of LIDER, we are approaching a point where we simply cannot help fulfill her financing needs. It is not for lack of trust or qualification—her repayment record is pristine and her business plan is sound—it is because as a Microcredit Foundation, we are not allowed. Our loan sizes are capped at only 10,000 BAM (5,000 EUR) while each machine she needs to take her business to the next level cost well above 10,000 EUR. 
Despite a law that could allow LIDER to transform into a for-profit microfinance Company, which are allowed to provide loans up to 25,000 Euros as well as a wide variety of products and non-financial services, extremely complex requirements have prevented LIDER and other Microcredit Foundations in Federation of BiH from moving forward.
Microfinance transformations, meaning the transition from a non-profit entity to a for-profit company or specialized bank, are a complicated subject in any country.  The notion of how to treat “donated equity,” for institutions that were started with grant funding, raises many questions for regulators over the governance of those funds.  This is especially true for Bosnia, where most microfinance institutions that exist today were started using grant money following the end of the conflict in the early 1990s, to get the country back on its feet. With such a large amount of donated equity in the sector, Bosnian regulators are understandably concerned with protecting those funds, to ensure they respect their original intent: to improve the lives of Bosnians in need.
The Bosnian narrative is made even more complex by the fact that the country has two sets of microfinance regulations: one for the Republic of Srpska and one for the Federation of BiH. While the law in the Republic of Srpska allows for Microcredit Foundations to transform into Microfinance Companies, by transferring all the assets and equity into a newly formed company; the law in the Federation is much more restrictive.  Even if a Foundation gets a permit to start its own Company, the Foundation cannot transfer any capital or assets, so the Company has to start from zero. This requirement effectively blocks the option of transformation in the Federation, and also prevents consolidation in the sector, which is something that the Federal Banking Agency would like to see.
As a result, Microcredit Foundations in the Republic of Srpska quickly took the opportunity to transform and are providing larger loans and a wider array of products and services across both Republic of Srpska and the Federation. Microfin, for example, which is the largest MFI in Republic of Srpska, has now become one of the largest and most important institutions in the whole country’s financial sector.  After transformation, it diversified its business to offer a full suite of services, all while staying true to its social mission of improving the lives of Bosnia’s most vulnerable population.  Today, in addition to Microfin MF Company, it also operates Microfin Bank, Microfin Insurance and Microfin Investment Fund.
While it may sound counterintuitive to move a non-profit to a for-profit status to help more people in need, the history and evolution of the financial inclusion industry proves the case:  The largest, most success microfinance institutions, with most ability attract resources, better corporate governance, and long-term financial health and sustainability, are the top tier, for-profit microfinance companies and specialized banks.  
To promote a truly inclusive financial sector, the Federation of Bosnia must reform its laws.  To do this, the local microfinance sector needs to work together – Microcredit Foundations, Microcredit Companies, regulators, local ministries, funders – to find a solution that will help advance the sector and the institutions already serving the economically disadvantaged. LIDER, and our peers at Eki, Partner, MiBospo and others, have done incredible work to build organizations that empower the economically disadvantaged and protect their rights as consumers. Let’s not limit our impact by saying “it’s complicated” or delaying further.  Let’s dig in together and find a way to make the system work better for everyone, including inspiring clients like Dženana.