ris ~~2 1008 NEWS ABOUT WORLD BANK GROUP SMALL AND MEDIUM ENTERPRISE INITIATIVES Vol. 1, No. 13 September 2000 . ~ . vMicro Enterprise Bank. Bosnia Promoting Economic Growth and Financial Sector Development S ince the end of its devastating war in 1995, IN BRIEF FBosnia and Herzegovina (BiH) has undertaken a massive reconstruction effort with supported from NAME: the international community. Annual per capita Micro Enterprise Bank, Bosnia GDP, which had shrunk to about $500, has dou- and Herzegovina (MEB-Bosnia) bled over the last five year. Thanks to the currency board arrangement the country has enjoyed mone- SPONSORS: tary stability. However, a difficult political envi- IFC; European Bank for ronment, severe governance problems and a lack Reconstruction and Development of structural reforms call into question the viabili- (EBRD); FMO (Netherlands); ty of the country's economy in the medium term. KfW (Germany); Internationale ..Micro Investitionen AG (IMI); Micro nesiSustained economic growth, however, requires Technical co-operation and onlendingfiinds have been urgent private sector development. provided bv the Governments of Japan and Norway, the European Private micro and small enterprises (MSEs) play a Union and IFC. From November key role in this process. In addition to the many 1997 to December 1999 MEB Bosnia was man- aged by staff members of Intern ationale Projekt SMEFACTS Consult IPC) GmbH, is a publication Fra nkfu r t. of the World Bank Group BEGAN: SME Department November 1997 Director TRACK RECORD: Harold Rosen In less than three years the bank has developed lFor iform n a strong $8.5 million Contact: micro/SME loan portfolio F-1. r and achieved profitability. Rob Wright Craftsman: MEB-financed goldsmith at work Rwright@ifc.org 3 !, in S Tel. #202 473 7997 Fax #202 522 3742 i enterprises that operate informally, it can be In addition, most banks do not show any interest assumed that there are more than 50,000 private in serving MSEs on a significant scale. For enterprises registered in Bosnia and Herzegovina, example, the loans available from commercial the vast majority of them micro businesses with banks start at about $25,000 to $50,000. On the fewer than five employees. As in other transition other hand, a large number of non-governmental economies, trade enterprises account for most of organizations (NGOs) provide loans and grants to the country's private MSEs. About 30% of these micro enterprises, with loan amounts up to are service enterprises, while small-scale produc- S5,000. However, NGOs are neither able nor ers probably account for less than 20%. The allowed to provide micro and small enterprises developmental constraint most frequently cited by with those non-credit financial services they private MSEs is their insufficient capitalization require in their daily business operations, e.g. and lack of access to credit. Over 90% finance savings accounts, international money transfers their operations exclusively with their own funds. and various types of bank guarantees. Moreover, Most of the entrepreneurs who are making use of the sustainability of many NGOs is questionable. borrowed funds have obtained loans from rela- tives, friends or informal lenders, whereas bank Results lending plays an insignificant role. MEB has now been in operation for almost three years. The results to date have been very satisfac- MEB-Bosnia was set up in November 1997 to tory. Based on a network of five branches address these issues. It is working to alleviate the (Sarajevo, llidza, Tuzla, Bihac and Mostar), the financial constraints faced by micro and small bank's total assets have grown to $12 million as enterprises by providing financial services on a of August 2000. The portfolio of loans outstand- country-wide basis that are specifically tailored ing comprised more than 2,800 loans with a com- to their demand. The institution focuses on lend- bined total volume of more than $8.5 million. The ing, deposit-taking, current account facilities, and vast majority are in the $1,000 to $10,000 range. domestic and international money transfers. The In the first eight months of this year, the dis- bank's corporate objective is to build an institu- bursed average loan amount has been at $4,000. tion that will be an enduring part of the local The productivity of the bank's 20 loan officers banking sector and thus contribute to the develop- has risen continuously to the point where they ment of the financial system in Bosnia. are, on average, each managing a portfolio worth $400,000, consisting of 150 loans, up from MEB was founded because, although Bosnia is $240,000 and 80 loans in August 1998. Portfolio highly overbanked, there is a severe underprovi- quality is high: only 0.7% of the outstanding bal- sion of financial services to the target group. ance was in arrears by more than 30 days. Both state-owned and private banks are very frag- ile due to their high levels of non-performing Fifty percent of the loans on MEB's books were loans, improperly provisioned assets, and dubious for working capital, the other half for fixed asset links between shareholders, customers and banks, investments; maturities ranged from 6 to 36 implying serious governance problems. It was months. Half of the outstanding portfolio was dis- therefore not surprising that when the local bursed to companies operating in the trade sector, authorities began tightening their control over 34% to service companies and 16% to the produc- financial institutions, a number of banks went tion sector. In addition, MEB offers housing into receivership or are about to be liquidated. reconstruction loans at its Tuzla and Bihac branch- And as time progresses, more of the 40 banks es. Housing reconstruction loans will also be that are still operating in Bosnia are also likely to added to the range of products available at the new close down or merge. Mostar branch, which has just recently opened. 2 The volume of transactions in the Treasury and Payments Division has increased steadily. The num- ber of current and savings accounts has grown to 2,050, with an aggregate deposit volume of $2 mil- lion. The money transfer business has also developed -' relatively favorably: on average, 600 national and international transfers are now carried out at the five branches every month, with a combined total volume of $2.0 million. BnMEB-Bosnia: Financing for Bosnian entrepreneurs. B3y June 1999, net income from operations had recouped the losses incurred during the start- its expanding branch network, to come a signifi- up phase, and by the end of 1999 the bank had cant step closer to providing country-wide money accumulated a retained profit of $135,000. transfer services. However, the main reason for For 2000, a return on equity of about 15% is optimism is the genuine commitment and solid expected. financial expertise of the shareholders, executives and staff. On this basis, MEB can be expected to Outlook emerge as one of the strongest financial institu- It goes without saying that economic and political tions in Bosnia and Herzegovina, playing a key developments in Bosnia and Herzegovina and in role in the development of the country's financial the region as a whole pose considerable risks to sector. the operational and economic performance of MEB. However, thanks to the relatively large number of loan contracts there is a considerable For information about World Bank Group SME diversification of risk in MEB's loan portfolio, activities in Southeast Europe, contact: leaving the institution less vulnerable to economic fluctuations than other banks operating in Bosnia. Christopher Miller The pending reform of the national money Balkan Enterprise Facility, Sarajevo transfer system in Bosnia also presents consider- Tel.: (+387-33) 217-76 able opportunities, as it will enable MEB, due to Fax: (+387-33) 217-762 E-mail: cmiller3@ifc.org 3