Wednesday, January 06, 2010

The dark side of micro-finance in Bosnia

Al Jazeera has an article about micro-finance in Bosnia. The theory is that microfinance helps people to start small businesses. Reality in Bosnia was that most loans were just used for consuming (nobody checked what you did with the money). Companies competed to extend loans and by the end of 2008 there were 390,000 loans on the books, together totaling over BAM 1 billion ($770m). As there was no central credit rating organization some people took several loans from different banks. Now the default rates are rising fast and the banks have become stingy.

For starting businesses the loans were not suitable. The rates were too high, the typical term of one year maximum much too short and the amounts of money available much too low. If you asked for 70,000 US$ it was not possible. So nothing was solved for the large communist era companies that wanted to transform themselves.

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