MICROCREDIT

AT A GLANCE

“Today, if you look at financial systems around the globe, more than half the population of the world – out of six billion people, more than three billion – do not qualify to take out a loan from a bank. This is a shame. What kind of institutions have we built that cannot afford to extend their services to the majority of the people?” (Muhammad Yunus interviewed in February 2005 by Nightly Business Report’s Linda O’Bryon while attending the World Health Care Congress in Washington, D.C.)

Microcredit is one of the financial service innovations that have developed considerably during the last decade, following the success of the grameen bank model in Bangladesh, founded by Muhammad Yunus and winner of the Nobel Prize in 2006. The term microfinance encompasses a variety of services such as microfinance, microsavings, microinsurance and money transfer vehicles. The microcredit summit campaign provides this definition of microcredit: “programmes that provide credit for self-employment and other financial and business services (including savings and technical assistance) to very poor persons. The rather small amounts involved in the microfinance services lead to the name ‘microfinance’.It is usually more difficult or even impossible for poorer people to access services of the regular financial sector. They do not possess sufficient funds to open a savings account, lack collateral to secure a loan, are unable to present a credit record, and might even lack capacity to correctly complete the necessary paperwork. For conventional banks, microfinance is not profitable enough, which lead many people to be marginalized from financial services preventing them to establish new businesses.In response to this discrepancy in access to financial services, the concept of microfinance appeared in 1970s. It started in South Asia and Latin America, and gained growing popularity in the following decades with a peak of interest during the last ten years. Its main characteristics are longer tenors, and absence of collateral, to remove unrealistic requirements classic loans usually lay on potential borrowers. Successes of microfinance activities were based on the fact that poorer borrowers are as reliable as classic loan clients and that encouraging entrepreneurship fosters local development. Studies have shown that poorer people do repay their loans, to a higher rate than in the usual formal financial sectors of most developing countries (ca 98%). The other advantage of microfinance programmes is that it targets sectors and geographical areas that are usually less covered by the conventional banks such as the rural areas and small-scale agricultural enterprises.Benefits of microfinance are numerous. Access to credit, however small, allows poor people to take advantage of economic opportunities. By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from “every-day survival” to “planning for the future.” (Consultative Group to Assist the Poor -CGAP: http://www.cgap.org/p/site/c/template.rc/1.26.1305/ ).

By developing a Microcredit programme, ALDA commits itself to help people in the Balkans benefit from access credit in order to encourage entrepreneurship and foster local development.

This project, initiated by the Association for Local Democracy Agencies (ALDA), in cooperation with the Banca Intesa San Paolo and the Norwegian Ministry of Foreign Affairs, is a three years initiative to encourage local entrepreneurship in the Balkans, namely in Croatia, Serbia and Bosnia. The Microcredit Project for the Balkans has gathered a vast range of actors willing to support small-scale initiatives in places where credit opportunities for local entrepreneurs are limited.

RATIONALE

The countries of the Western Balkans where the project will be based are slowly but steadily proceeding towards European integration. Economic development and democratiSation are equally important for the fulfilment of these tasks and in order for both to be successful; development of the capacities at the local level is crucial. The economic situation all over the region is rather difficult. The effects of the painful transition process are currently exacerbated by the consequences of the global economic crisis. Among the difficulties are the political heritage from the past and an economic transition, which hardly find a solution to old and costly systems of production. The balance to be assured between private and public companies is often the results of blind and shortsighted strategies, which leaves a large part of the population without assistance and real possibility of having a future. The war that ravaged the region for ten years left evident traces in the economy, in particular in Bosnia and Herzegovina and some parts of Croatia and the infrastructural reconstruction remains a relevant burden for the countries, that often decide “to give up” on certain remote areas. Serbia, on its behalf maybe not affected by the conflict directly as the two aforementioned countries, rates among the countries with the highest number of internally displaced persons and refugees in the world. Another problem is also given by the rigid and costly credit system in all the countries of the region. Many existing companies – and almost all the new or start- up ones – cannot afford the interest rates offered in the market. The vicious circle implies that even the good ideas and the prepared business people have to leave the country and join the brain drain, which reaches worrying peaks in BiH and in Kosovo/UNMIK. The banking system leaves out most of the proposal in their start-up phase. The proposed microcredit scheme, with its conditions, inserts itself among the few “socially responsible” opportunities in the market.

OBJECTIVES

• Introducing an integrated approach to microcredit with a goal of promotion of start-up businesses, job- creation, promoting local economic development etc
• Promoting a long-lasting and sustainable local economic development in South East Europe fostered by start-up entrepreneurs. Having in mind the difficult situation in which the region is facing itself, the main goal of the project is to contribute to the creation of new employment opportunities in these countries and to help the overall economic and social recovery of the region.
• Promoting the public-private partnership through the work of the well-structured Local Democracy Agencies for supporting the microcredit scheme and assisting the clients
• Assisting in drafting innovative and sustainable business plans for the microcredit, consequently, activation of successful businesses of young people
• Returning of the full credit in the medium term