MFG en Paper Microcredit Organizations and Savings Mobilization in Bosnia and Herzegovina An Assessment For Usaid Oct 2003

Microcredit Organizations and
Savings Mobilization
in Bosnia and Herzegovina
An Assessment for USAID
Conducted by
Financial Sector Business Advocacy and Training (FSBAT)
Monica Lindh de Montoya

James Kent McNeil
27 October 2003
USAID FSBAT 2 9/17/2008
Microcredit Organizations and Savings Mobilization
EXECUTIVE OVERVIEW
Purpose of the Assessment
For the past seven years Bosnia and Herzegovina has been struggling to regain a viable
economy and to repair the extensive damage of the 1992-95 war. Micro Credit Organizations
(MCOs) have made substantial contributions to this effort by providing credit services to
individuals for income generation and to entrepreneurs seeking to build small businesses. The
funding has been provided by governmental and non-governmental organizations. Today,
some of the larger MCOs are regarded as self-sustainable,1 which has resulted in many of the
donor organizations no longer providing loans or grants. To remain self-sustainable and to
grow, the MCOs will have to find ways to identify continuous and sufficient funding sources,
at reasonable interest rates. One possibility is for MCOs to begin mobilizing savings from
their borrowers and the communities in which they operate. The goal of this assessment is to
determine if a demand for deposit services exists within the markets served by the MCOs,
whether the MCOs are interested in pursuing such a solution to long term sustainability, and,
if they were to transform to begin taking deposits, how such a transformation should be
implemented.
Findings
The main findings of our research are that

MCOs would like to have the ability to accept deposits;
There is a demand for savings products in the rural and economically disadvantaged
population;
Banks are unlikely to serve those needs.
Level of Interest from MCOs
Most of the nine MCOs interviewed for this research expressed an interest and a desire to
collect deposits and to use those deposits as an additional source of funds for future loans.
However, many expressed concern and reticence in committing resources to examining this
alternative because the existing law under which they operate limits them to only making
loans. Most plan to wait until they see legal changes implemented before they begin to
develop plans and strategies for soliciting deposits. A few have started to move towards the
1
A self-sustainable organization is one that can survive, continue its mission and grow without donor funding.
An important aspect of this is financial; the organization must be able to cover its operational costs and its cost
of funds. Other important aspects of sustainability include being able to invest in staff training, product
development, and infrastructural upgrades.

goal of savings recruitment by upgrading their technology systems or conducting modest
market research, but not much beyond those efforts.
Most MCOs interviewed are exploring new products to meet the demands of their clients.
This is usually in the form of loan products, but some are exploring the possibilities of
providing leasing or insurance products. A characteristic that MCOs share is a strong desire
to serve the rural and economically disadvantaged population. To do this they need more
flexibility than the current law permits to explore different options, including deposit
services.
The MCOs interviewed voiced strong opinions about the need for proper and effective
regulation of any organization that accepts deposit. They believe that regulation is essential to
assure the public that their deposits are in financially sound institutions. However, they
cautioned that MCOs are quite different from banks and should be regulated by a special set
of regulations and examiners that specialize in micro credit.
Additionally, they recognize the demands that taking deposits will put on their organizations,
and most expressed a need for outside technical assistance during a conversion period which
they believe could last up to two years.
Market Demand
Our findings show that most Bosnians save, but in different ways. Particularly, the rural and
economically disadvantaged population save in informal ways, as opposed to putting their
money in the banks. Their savings may be in the form of purchases such as building material
or animals. What money they have is kept in the home. Most expressed a need to have money
set aside for emergencies. Market research showed that twice as many save at home as in a
bank. The entrepreneurs presently prefer to put most of their profits back into their business
rather than keeping it in the bank.
Because of the destruction from the 1992-95 war, most excess funds in the rural areas are
being put into reconstruction of homes and businesses. However, eventually this use of funds
will diminish and there will be a greater need for more formal ways of savings.
The Role of Banks
In the rural areas and among the economically disadvantaged, banks are still regarded with
suspicion because of the losses that many experienced with the collapse of the banking
system in 1991. Banks are also viewed as being difficult to get to, unfriendly to less
economically well off citizens, and inflexible and bureaucratic in their procedures. The more
rural (villages of 2,000 or less) customers have to travel quite far to get to a bank, which
makes them very inconvenient. None of the banks interviewed for this assessment have plans
to expand their branch network into the rural areas and will continue to focus on the more
populous urban areas.
Our research also determined that the economically disadvantaged have special needs that are
not served by current banking products. This economic group needs to have frequent and
convenient access to their account. They usually make frequent deposits and withdrawals and
in small amounts. This is not a type of product that banks are interested in providing.

The lending methods used by MCOs also differ considerably from those of the banks. Banks
usually require collateral and only lend to properly registered businesses. The very small size
of the average MCO client would make both of these requirements onerous. The average
MCO loan is backed not by collateral but guarantors. Most borrowers are emerging
entrepreneurs and cannot or do not have the financial means to register their budding
enterprise. The MCOs understand these needs and limitations and correspondently structure
their loans requirements. Our findings indicate that banks and MCOs serve different markets
and that both serve an important function of economic growth in Bosnia. If MCOs begin
taking deposits, they will continue to draw from a segment of the economy not targeted or
served by the banks.
Enabling MCOs to Take Deposits
If MCOs are allowed to begin receiving deposits, significant changes and assistance will be
needed. First, the existing legal framework needs to change to allow MCOs to transform to
another legal structure. Then, new laws need to be created to allow for the functioning of a
financial services company other than a bank. This structure may be in the form of a savings
and credit association or a micro bank.
A critical enabling step will be the creation of appropriate and effective regulation. What
section of the government should undertake this endeavor will have to be thoroughly
discussed and reasoned through. In conjunction with proper regulation, deposit insurance is
an important consideration. The MCOs believe that it is an essential step in ensuring the
depositors that their money is safe.
Because MCOs have, so far, only made loans they would need to make a significant
infrastructural change both in concept and execution to begin receiving deposits. All would
need additional hardware and software, as well as capacity building in market research and
product development. When all of these enabling steps have been taken, the MCOs will need
to have a strong, effective, specifically targeted publicity program.
Background
The larger and more active MCOs in BiH are considered to have done an excellent job of
providing financing for micro-businesses. Most are well-run, profitable enterprises (but
classified as non-profit). They are heavily reliant on donor funding or subsidized loans,
however, and only a few have qualified for lines of credit from commercial banks. As the
postwar situation in BiH stabilizes and the economy slowly begins to recover, many of the
donors who contributed to the MCOs financing are withdrawing from the arena. The larger,
more stable MCOs will be able to continue their lending activities with the assets they have
acquired, but they will not be able to continue to lend at current levels, or to grow without
new sources of funding, and consequently their mission of lending to the financially
underserved will become more difficult.
There are two donor initiatives underway in BiH which will have implications for the MCOs.
The World Bank is working to change the existing Law on Microcredit Organizations and to
create a new law on Finance Companies. First, it will amend BiH microcredit law to allow an
MCO to fund, or to invest in a for-profit, shareholder- or member-based organization. Once

the amendments are in place they will launch an effort to create a new law that will allow for
the creation of finance companies. The amendments to the Law on Microcredit Organizations
will not address how an MCO should initiate a transformation; only allow it to do so. The
alternative structures will have to be explored by the MCOs.
The International Fund for Agricultural Development (IFAD) is working on a new law
allowing the creation of Savings and Credit Associations (S&Cs). As part of a project to
develop a replicable model of sustainable, small-scale commercial livestock production,
IFAD is seeking to support the development of an S&C industry to help rural areas establish
small saving and credit associations in which the farmers would be the members. The first
obstacle to getting this concept underway is the lack of a law under which such institutions
would operate, which IFAD hopes to complete by year end 2003. They will also support the
development of regulatory policy and procedures. Once the framework has been set up, IFAD
will go about developing the S&C associations themselves: they are envisioned as small
associations functioning in rural communities.
The World Bank initiative to create a law for Finance Companies will give MCOs an
alternative that will allow for a more expanded product line of loans. However, it will not
provide MCOs with the option of taking deposits or of offering other financial services. The
IFAD efforts to introduce a new law for S&Cs is focused on creating very small
organizations that will primarily take savings deposits. There is no consideration or
collaboration with MCOs on how such a law could benefit them. Based on our research we
find that both initiatives fall short of both giving MCOs the flexibility that they will need to
properly service their markets and providing the resources that they will need for long term
sustainability.
Savings Mobilization as a Strategy for Sustainability
The mobilization of savings has until recently been the forgotten half of microfinance. It
was assumed that the economically disadvantaged are unable to save, and indeed, there is
documented evidence that these social groups savings in formal institutions are low. People
with low incomes do save, however, because they must; otherwise they have nothing to fall
back on in an emergency. Their savings take a multitude of forms. They may be in cash that
is stored in the home or other safe place, or held in an institution (bank, cooperative, or
Rotating Savings and Credit Association, ROSCA). Savings are often held in-kind; in grain
or other non-perishable crops, animals, gold, land, raw materials, construction materials, or
finished goods. Income can also be lent to friends or relatives for economic or non-economic
returns (social reciprocity, status, influence over others decisions, etc.), and labor and favors
can also be used in this way - given in the knowledge that they can be called back, in another
form, at another opportunity.
Research conducted by microfinance practitioners throughout the developing world indicates

that low-income households will deposit their surpluses in formal institutions under the
following conditions. The depositors must be convinced that the institution is safe, and it
must offer savings products that meet their needs. Banks generally do not offer appropriate
products, and economically disadvantaged people often feel uncomfortable about going into a
bank. Experience has shown that micro finance institutions (MFIs) that offer deposit products
in addition to micro loans serve a much larger market than micro-credit organizations
(MCOs) that only make loans, and have a greater impact on economic development. The

number of depositors is often greater than the number of borrowers; the economically
disadvantaged save all the time, but only borrow occasionally.
Thus, mobilizing savings can benefit both an MCO and its clientele. The MCO receives
resources that can be lent, and the community has an institution that understands them and
provides needed deposit products. It is a strategy that effectively serves both parties.
MCOs should only mobilize savings from the public when certain criteria are met:
There should be an enabling macro-economy with an appropriate legal and regulatory

environment, political stability, and suitable demographic conditions.
There must be good supervision of micro-finance institutions - all financial
institutions mobilizing voluntary savings should come under government supervision.
Before mobilizing public savings, a MCO should have demonstrated good
management of its own funds and be financially solvent.
Bosnia and its MCOs meet many of these conditions, and are well positioned to meet all of
them. However, there are also important differences between Bosnia and other countries
where savings mobilization by small deposit-taking institutions has been successful. It is a
much smaller country, less densely populated, and has just undergone a very destructive war.
Its population is well-educated, relatively better-off economically, and have wide contacts
with global society. Also, the country has a well-developed, secure banking system that,
unfortunately, does not enjoy the complete trust and wide use of the general public. For these
reasons new savings products will have to be sophisticated, competitive, and well in-tune
with the MCO clients particular needs. It is also possible that deposits may be quite large,
compared to MFIs worldwide, and that they will start slowly but increase when war
reconstruction draws towards an end and people have regained pre-war living standards.
The Market for Savings
Fieldwork to determine the market for savings in BiH was carried out during the months of
June and July 2003. Five inter-related methods were used:
A quantitative nationwide survey on the savings and spending habits of the
population, and their recognition of banks and MCOs was carried out with Mareco
Index Bosnia (MIB) market research agency.
Qualitative interviews on the subject of savings were held with respondents in Banja
Luka, Mostar and Tuzla with Puls market research agency.
Focus groups were held with rural and urban people in the same locations, also with
Puls.
Focus groups were held by FSBAT staff with loan officers from three leading MCOs.
Interviews were held by FSBAT staff with rural and urban clients of five MCOs.
The findings indicate that while Bosnians have a tradition of saving in banks and value this
habit highly, this is not the way in which most people save today. It is more common for
people to keep money within their homes, something which is a reflection of the small size of
the sums that they are able to accumulate, the precariousness of their economic situation, a
loss of trust in the banks due to the collapse of the banking system during the war, and the
unpleasantness and inconvenience associated with visits to the bank. A few save large sums

at home due to a total lack of confidence in the banking system, or make arrangements to
save abroad.
Also, there is a strong pattern of making investment in order to save. Mistrusting formal
financial institutions, those who are able chose to put their reserves in real estate; for example
either by building, or by buying a house or apartment. This is also seen as an income-
generating strategy, as houses and apartments can be rented. Investing in real estate or in
ones own business is considered to be the safest way of saving, safer than keeping money in
ones home, or in a bank.
The small entrepreneurs that are the clients of the MCOs are most likely to save by
reinvesting in their businesses; either by increasing their stock, investing in machinery or
premises, or by diversifying their activities. Buying inventory is the way in which most MCO
clients save; and in the rural setting people may invest in animals, which give much better
returns than bank savings.
Thus one sees that in Bosnia today savings most frequently either take the form of cash held
in the home, in-kind holdings, or investment in real estate or in business. Finally, a form of
savings which we quite often heard about among better-off people is life insurance that builds
up cash value, which they view as long term savings. They are also given the option of being
able to borrow against the cash value for unexpected needs. An insurance plan (preferably
with a foreign based company) is quickly becoming an attractive alternative for part of the
population, demonstrating again a wish to save but distrust of local alternatives.
Micro-credit Organizations, Strategic Planning, and the Question of Deposit-Taking
A key component of this assessment is the plans and concerns of the MCOs. To learn in
depth about these issues we visited the executive directors of nine MCOs, of which eight
represented the largest, and one was a smaller but well-run organization. The focus of our
discussions was on the plans they are making for the future and their level of interest in
taking savings deposits. We found that all had considered how to continue functioning for the
long term, especially after donor loans and grants are no longer forthcoming. Because of this,
all expressed some interest in taking deposits, but the level of interest varied.
Most directors view the current Law on Micro Credit Organizations (Law) as a major
obstacle in the way of change or growth. As one manager put it Microcredit organizations
are the only financial institutions that have no room to grow. They can expand (their product
mix) but they cannot grow. This reflected the frustration that most felt about their current
situation. Another manager stated that from the beginning, he viewed the current condition as
a transitional form. All have explored commercial lines of credit as a way to expand their
lending and sustainability after the donor funds are gone. However, they realize that the cost
of borrowing will increase substantially from the average rate of 3% from donor loans to
8.5%-10% on commercial loans. One consequence of the drive to get commercial bank lines
of credit has been the need to purchase office space from which to operate, because the only
way to get a line of credit is to pledge collateral.
With each MCO we also discussed the other alternatives that have been explored by the
World Bank and LID (Local Initiative Department, the agency supervising Bosnian MCOs).
Each director has considered the transition into a Finance Company, but few had done

extensive research or planning. Most are waiting for the current Law to be amended and for
the new Law on Finance Companies to be enacted before developing a transition strategy.
Some had considered merging with a bank as a way of getting access to more funds for
lending. However, the concern about culture clash and loss of autonomy weighed heavily on
them. One organization has explored some sort of partnership arrangement where the bank
would supply the line of credit and the MCO would direct their clients to make their deposits
at the bank. However, these explorations are in the very preliminary stages. One director has
given serious thought to becoming a micro bank, which would require raising significant
capital to meet the minimum required by the Law on Banking.
Even though most expressed an interest in receiving deposits, they regard it warily. It
represents a large unknown change from their current style of business and a major challenge.
Those that had considered it to any depth realize that the transformation from making loans to
becoming a more full service financial institution would take a substantial amount of time,
such as two years. Some expressed that the only way such a transformation could be achieved
was with technical assistance and training from a donor organization.
Each expressed the necessity for government regulation to ensure the safety of public funds,
and the need for some form of deposit insurance. Most had little doubt about the potential of
deposits being out there, or their ability to attract them. However, they are concerned by the
complexity of the many obstacles and changes that must be faced before transformation could
be realized.
One message that was consistent with all MCOs is their devotion to serving the needs of low-
income, financially underserved, and rural communities. They see their mission as quite
different from that of the banks, and that the need for their type of services will continue for
many years. Therefore, they want to avoid any change that would result in mission drift.
BiH Bank Expansion Plans
If the MCOs begin to take deposits, what impact will the plans of the banks have on their
efforts? To understand this more clearly, we interviewed six banks. These included the three
largest banks, all of which have either recently merged with another bank or will merge
within the next year. The other banks interviewed were medium to small banks, but active in
expanding.
The three largest banks will each have 50 or more branches through mergers that are in
process, and will cover most of the country. One bank of the three does not have aggressive
expansion plans while the other two do. However each has a different focus. One plans to
expand their consumer business by expanding their credit card and ATM network. The other,
which has a low loan to deposit ratio, plans to actively pursue lending to small and medium
enterprises. One opinion expressed was that the rural areas are more cash oriented, and
therefore, not bank-oriented, indicating a lack of interest in developing a strategy to serve
the rural markets. This leaves a major portion of the BiH market to the MCOs, as current
market research estimates that 43% of the BiH population lives in rural areas.2
The attitude of the largest banks toward the micro credit industry varied. One saw the
potential of MCOs beginning to take deposits as a concern, because they are small and not as
2
Rural is defined by BiH market research firms as towns with 2,000 or less inhabitants.

strong as the banks. The banks are working to regain the trust of depositors, and they fear that
the gathering of deposits by MCOs might hinder that effort. Another bank decided that it was
better for them to lend to the MCOs than to compete with them in the rural markets. The
banker interviewed believes that they can gain good loans and substantial deposits while
taking much less risk.
The smaller banks interviewed have expansion plans but are limited by capital and resources.
Therefore, their expansion is either focused on specific areas in the market or on major
population centers. There seemed to be little interest in developing any strategy for servicing
the low-income or rural markets. As one banker pointed out, making micro loans requires
greater personnel and closer monitoring than SME (small or medium-sized enterprise) loans.
The banks do not have the resources or interest to have loan officers constantly on the road
servicing micro borrowers as the MCOs do. As another banker pointed out, micro borrowers
are rarely registered as a legal business, and do not have proper collateral, or proper financial
statements. These issues point to a significant gap between a banking culture and a micro
lending mission.
The total banking system has over KM 5 billion in assets compared to the MCO industry with
KM 150 million, or less than 3%.3 If the MCOs began to take deposits, it is doubtful that they
would have much impact on the banking system, nor do the banks have much interest in the
market served by the MCOs. Rather than competing with banks, MCOs will be
complementing their services.
Current estimates show that 43% of the population of BiH live in rural areas that market
research firms define as communities with 2,000 or less. Few banks have branches in such
small communities, and none of the larger banks intend to expand to these areas. As a result,
those MCOs that might transform to begin taking deposits would be servicing a market that is
underserved by the banks. The MCOs have demonstrated that they can reach a large number
of people with very small resources. As of June 2002, the eight MCOs supported by the
World Bank initiative (which includes the largest MCOs) had either created or sustained
180,000 jobs in their six year life. Therefore, even though the MCOs represent a very small
portion of the total assets in the financial sector that are proving to have a significant impact
on the rural and economically underserved population.
The market research conducted for this assessment indicates that at least 20% of the rural
population save for emergencies, but keep the money in their homes. If this portion of the
population began to deposit even modest sums into MCOs, it could have a significant impact
on the growth of the industry. BiH has a population of approximately 4 million therefore,
43% would be 1.7 million. If 20% of these citizens deposited KM 1,000 in MCOs it would
be KM 344 million. This would give the MCO industry the potential of doubling its size and
substantially broadening its outreach. Of course this is just a hypothetical example and the
transformation from its current structure would take the MCOs several years to implement,
however, the example is used to point out the possibilities using modest amounts.
Discussion and Recommendations
3
This figure is an educated estimate. No information is currently available on the total assets of all of BiHs
MCOs.

It is clear from all discussions with the general directors of the MCOs that we interviewed
that important perspectives are shared by each. They all are committed to surviving for the
long term; they are determined to meet the needs of the economically disadvantaged; and
they want to be able to offer more services and products to their markets, including deposits.
On the basis of our assessment, we recommend that MCOs should be given the opportunity to
become stronger financially and be allowed to diversify their activities. We believe that this
diversification include the mobilization of savings. This would enable them to move away
from donor dependency and the limitations placed on them by the current laws. If they are
able to offer broader services, two goals will be met. First, the economically disadvantaged
will be provided services that are available to them through banks but are seldom used.
Secondly, the MCOs will gain valuable resources toward becoming self-sustainable for the
long-term and broadening their outreach.
The opportunities for further growth are present in most markets and are confirmed by MCO
management which told us that demand for loans always exceeds their available funds. In
addition, major organizations such as World Bank, USAID, and IFAD are funding large
projects to expand and strengthen the agricultural sector of BiH, which is one of the main
markets now served by MCOs.
Our research determined that the MCOs are well managed and are constantly creating and
revising their business plans and strategic plans to meet the ever changing needs of their
markets. They have gained a great deal of skill and knowledge of their markets, and are
seeking ways to best utilize them. All MCO managers believe that there are savings to
mobilize and that they can succeed in doing so. Their experience tells them that many of their
clients have cash reserves to draw on, and are constantly investing in their businesses. Our
findings also indicate that many people save cash in their homes, and that people lend money
to friends and family on a regular basis. With properly designed products, MCOs can tap this
market. We believe that the MCOs greatest competition for deposit will not be from the
banks but from the mattress, pillow, and sock where savings are being stored today. The
market that the MCOs are after is not a focus of banks strategies, nor will the MCOs efforts
to mobilize savings have any impact on the banks.
With the legal changes that are underway, MCOs will have the ability to transform into
different organizational structures. We recommend that the MCOs that would like, and are
capable of receiving deposits be able to do so. However, researchers working in other
countries are emphatic in their recommendation that MCOs who undertake a transition from
only making loans to receiving deposits receive long-term and thorough technical assistance.
This assistance includes areas such as: legal framework, regulation, deposit insurance,
capital, product design, marketing, and training. We recommend that donors consider
providing such assistance. Through such a transformation, we believe that MCOs will be able
to continue serving an important market for BiH, play an important role in the total financial
services industry, and substantially contribute to the success of development initiatives,
especially in the agricultural sector.
What Can Donors Do?
Our assessment indicates that donor organizations can play an important role in ensuring that
the legal framework is appropriate and well designed. The World Bank and IFAD are

currently working on this area, but additional attention needs to be given to ensure that MCOs
will be able to function under the new laws allowing deposit taking.
A question that is paramount in the minds of the MCOs and others considering alternative
organizational structures for MCOs is how MCOs that accept deposits should be regulated
and supervised. Different approaches that have been used in other countries can provide a
framework within which regulation can be developed. This is an area that needs involvement
from the international community to resolve this very serious concern.
Whether deposit insurance is appropriate for MCOs that accept deposits is another issue that
donor organizations can address. Once again, the international community can play an
important role in determining the advisability of deposit insurance.
Capacity building and training will be an essential and long-term requirement for successfully
transforming MCOs from lending-only institutions into financial intermediaries that offer a
broader range of services. The initial training can be supplied by donor organizations that
have helped to set up similar types of operations in other transitional economies. Much can
be learned from mistakes and successes experienced in other countries around the world.
One area with which MCOs still struggle is marketing. If MCOs begin accepting deposits,
marketing will become an even greater need. Segmenting and analyzing their markets will be
necessary to designing effective products and then getting the message to appropriate
markets. The donor community can supply market specialists to help this effort.
Finally, the need for effective strategic planning and management skills is critical for success
of such a transformation. The World Bank has been providing such training, which has
played an important role in the success to date for the large MCOs. However, additional skill
development will be necessary if MCOs convert from just lending to becoming financial
intermediaries. Because of the success to date of the larger MCOs, such technical assistance
can be tailored to specific needs, which may shorten or reduce the amount of time and
assistance needed.
Impact
Our findings indicate that if selected MCO transform their structures to begin receiving
deposits there will be several very favorable consequences. First the MCOs will begin to
capture savings that are not currently in the financial system. The additional savings will
contribute to greater economic growth for BiH.
A second impact will be that these additional resources will expand MCOs liquidity for
lending. The inflow of deposit would be slow initially, but can be expected to grow as
conditions improve and MCOs become more widely known. Therefore, while the MCOs are
gaining additional funds, a major segment of the population will have access to a more formal
form of savings not available to them today.
The micro lending experience over the last 6 years has demonstrated that entrepreneurialism
is very prevalent in the rural areas and among the economically disadvantaged. Expanding
the services that MCOs can offer will continue to encourage entrepreneurialism and provide
the necessary financial services for it to further expand. With a wider range of financial
services, MCOs will reach a broad segment of the population. Such an expanded outreach

will meet the MCOs mission, as well as provide a necessary element for further economic
growth and job formation in BiH.

Microcredit Organizations and
Savings Mobilization

Table of Contents
Executive Overview...............................................................................................................3
Purpose of the Assessment.................................................................................................3
Findings..............................................................................................................................3
Background........................................................................................................................5
Introduction..........................................................................................................................18
Background......................................................................................................................18
Donor Situation................................................................................................................19
Current Funding...............................................................................................................20
New Initiatives that Could Impact MCOs........................................................................21
World Bank Initiatives ................................................................................................21
International Fund for Agricultural Development (IFAD)..........................................22
Savings Mobilization as a Sustainability Strategy ..............................................................26
How do the Economically Disadvantaged Save?.............................................................27
When to Introduce Savings in Micro-credit Institutions..................................................29
Experiences......................................................................................................................31
What is Relevant for BiH?...............................................................................................33
The Market for Savings........................................................................................................36
Methods Used in the Assessment.....................................................................................36
Savings in Public Sphere: Quantitative and Qualitative Surveys ....................................37
Defining Savings: Overview of the Findings...............................................................37
MIB Market Survey Report..............................................................................................39
Puls Qualitative Market Research - Individual Interviews and Focus Groups................42
Savings Traditions and Current Practices................................................................43
Extra Income............................................................................................................46
Emergencies.............................................................................................................46
Recognition and Trust of Financial Institutions.......................................................47
Savings as seen from the MCOs Focus Groups with Loan Officers.............................48
Savings.........................................................................................................................49
Loans as Savings..........................................................................................................49
The Relative Strengths of MCOs in Collecting Savings..............................................50
Interviews with MCO Clients..........................................................................................51
Savings from the Perspective of the Entrepreneur.......................................................52
Relationships with the MCO, and the Issue of Savings...............................................52
Conclusions......................................................................................................................53
Micro-credit Organizations, Strategic Planning, and the Question of Deposit-taking.........55
Microcredit Institutions in BiH........................................................................................57
EKI Ms. Sadina Bina, Director.................................................................................58
Partner Mr. Senad Sinanovic, Executive Director....................................................58
Mikrofin Mr. Aleksandar Kremenovic, Director......................................................58
LOK Mr. Nusret Causevic, General Manager ..........................................................59
Micro Sunrise - Mr. Milan Seselj, Financial Manager.................................................59
Mi-Bospo - Ms. Nejira Nalic, Executive Director ......................................................59
Prizma - Ms. Maja Gizdic, Executive Director............................................................60
Sinergija Plus - Mr. Zeljko Bogdanic and Mr. Milord Dokic......................................60
Mikro Aldi - Ms. Ferida Softic, Executive Director....................................................61
Legal Framework.............................................................................................................62
Regulation....................................................................................................................63

Deposit Insurance.........................................................................................................63
Conclusions......................................................................................................................64
BiH Bank Expansion Plans..................................................................................................66
Banks................................................................................................................................66
Conclusions......................................................................................................................68
Discussion and Recommendations ......................................................................................70
References............................................................................................................................74
Glossary of Abbreviations....................................................................................................76
EKI...............................................................................................................................84
Partner..........................................................................................................................85
Mikrofin.......................................................................................................................86
LOK..............................................................................................................................87
Micro Sunrise...............................................................................................................89
Mi-Bospo......................................................................................................................90
Prizma...........................................................................................................................91
Sinergija Plus................................................................................................................92
Mikro Aldi ...................................................................................................................94
Raiffeisen Bank............................................................................................................96
Zagrebacka Bank..........................................................................................................96
Hypo Bank....................................................................................................................98
MEB Bank....................................................................................................................99
UPI Bank ...................................................................................................................100
Volksbank ..................................................................................................................100
Table 1 Organizations providing funding to larger MCOs ...................................................20
Table 2 Types of informal savings (Robinson 2001).............................................................27
Table 3 Goals and priorities in savings..................................................................................29
Table 4 Typical MCO Client in BiH..............................................................................34
Table 5 Methods of data collection used in this assessment..................................................37
Table 6 Prewar and postwar financial conditions and ways of saving...................................45
Table 7 How entrepreneurs use loans to create savings.........................................................49
Table 8 Economic overview of interviewed MCOs...............................................................58
Table 9 Main Points of MCO Interviews Summarized .........................................................61
Table 10 Overview of balance sheets of interviewed banks....................................................66
Annex A Notes on Methodology............................................................................................78

Annex B How do the people you know save? The responses of 36 interviewees...............80
Annex C Basic Information about MCOs and summaries of interviews with their general
managers...................................................................................................................................84
Annex D Summaries of interviews with general managers of six selected banks concerning
their plans for expansion..........................................................................................................96

Microcredit Organizations and Savings Mobilization
INTRODUCTION
For the last seven years USAID has sponsored various programs to help revitalize the Bosnia
and Herzegovina (BiH) economy and to get people back to work. While USAIDs largest
project Business Finance was lending to small- and medium-sized enterprises and helping to
generate new jobs, the World Bank and other organizations were helping to set up micro
credit organizations (MCOs) to provide funds to entrepreneurs and micro businesses. As the
MCOs thrived and expanded, it became clear that they would play an important role in job
creation and, particularly, in self-employment. Loans and grants from the World Bank and
other donors have been and continue to be their primary source of funding. The Business
Finance project also contributed to this effort by extending on-lending lines of credit to six
MCOs. However to achieve long-term self-sustainability and to grow, these organizations
must find other sources of funding because projects such as Business Finance have come to
an end and other donor funds are no longer available. One possible alternative is for them to
begin mobilizing savings, and to transform into Savings and Credit Associations (S&C). In
order to properly explore this alternative, USAID requested that Financial Sector Business
Advocacy and Training (FSBAT) conduct an assessment to determine if there is sufficient
demand in the markets served by MCOs, whether they are interested in pursuing such a
solution to long-term sustainability, and, if they were to transform their legal structure to
begin taking deposits, how such a transformation should be implemented.
Background
The World Bank program for micro lending was developed to address the financially
disadvantaged, particularly in rural areas. Prior to the war, BiH had limited experience in
micro lending, and did not have an environment conducive to entrepreneurialism or self-
employment. The banks were not interested or organized to make loans to startup businesses,
or to lend small amounts. The World Bank created a test program in Tuzla with three micro-
credit type organizations. It met with immediate success and proved a strong need for micro-
lending. As a result, the World Bank launched a major project to create and support micro-
credit organizations (MCOs) throughout the country, and in 1996, Local Initiatives Project
(LIP) was designed and implemented. A loan of $22 million was granted to the Bosnian
Government, which set up the Local Initiatives Departments (LIDs) to administer the newly
created MCOs in both the Federation and the Republic of Srpska (RS).
The goals were to:
1. Provide access to loans to those persons, and low-income entrepreneurs, who did not
have access to commercial loans, especially to bank loans;
2. Establish self-sustainable micro credit institutions;
3. Support the improvement of the legal framework for non-bank microfinance

institutions.

The third goal was realized through the adoption of the Law on Microcredit Organizations
which was passed in 2001.
Despite all the difficulties which followed the post-conflict environment, it was determined
that citizens were ready to pay the price for micro lending services. Right after the war in
1996, the government and other donors tried to encourage subsidized lending. But LIP
encouraged partner micro credit organizations to charge fully for the services provided to the
target clientele, in order to reach financial self-sustainability within 3 to 5 years. The
experience gained from LIP 1 showed that clients were more than ready to pay the price for
financial services in order to be able to create a business and provide themselves with a
source of income.
When the $22 million project started, 17 non-governmental organizations (which were later
registered as microcredit organizations) from BiH were selected on the basis of a competitive
and selective process. After a mid-term review in 1998, nine microcredit organizations were
determined to not be sustainable and were merged into the remaining eight. Those eight
remain as the strongest of the 17 actively functioning MCOs, and comprise 70% of the sector
based on earning assets. The original goal was for the project to provide between 7,000 to
10,000 loans of up to KM 10,000. As of June 2002, the project has resulted in 130,000 loans
which created or sustained 180,000 jobs. The eight surviving MCOs have 30,000 active
clients and averaged KM 3,500 per loan. The impact of the project has far exceeded the
original goals and expectation. This also demonstrates that the MCOs are meeting a far
greater need than was anticipated in the rural and economically underserved markets. It is
not unreasonable to assume that the deposit needs and expectations can also be greater than
what can be ascertained through market research surveys.
Donor Situation
From their inception the MCOs have been heavily reliant on either donor funds or subsidized
loans. Only a few have qualified for lines of credit from commercial banks. On the chart on
the following page is a sample of the organizations that have contributed to the funding of
nine of the largest MCOs.
Many of the funds listed were made as loans and then converted as contributed capital, as
part of the design to help the fledgling industry get its initial working capital. Some of the
organizations that are listed as Still active may not continue to be sources of grants or
loans. The commercial banks will continue to be a source, but only for those MCOs that
have sufficient size, cash flow, and collateral.

Table 1 Organizations providing funding to larger MCOs
Institution Amount in KM Current status

World Bank (LIP I & II) 91,000,000 Still active
USAID Business Finance 11,150,000 No longer active
World Vision 9,000,000 Still active with EKI
US Department of Agriculture 4,710,000 No further funds exp.
US Bureau of Population, etc BPRM 4,400,000 No further funds exp.
CARE International 4,200,000 No further funds exp.
UNHCR 2,900,000 Still active
Raiffeisen Bank 2,700,000 Commercial bank
Catholic Organization for Relief and Dev 2,100,000 No further funds exp.
KfW 2,000,000 Still active
NOVIB 1,500,000 Still active
Government of Ireland 1,280,000 No further funds exp.
Zepter Kommerc 750,000 Commercial bank
OXFAM 500,000 Still active
Womens Banking Association 500,000 Still active
Dexia Micro Credit Fund, Luxembourg 433,000 Still active
Stiching Triodos-Doen 390,000 Still active
COSPE of Italy 320,000 No further funds exp.
Deutsche Bank Micro Financing Fund 280,000 Commercial bank
Mercy Corp/SEA 273,000 Still active
International Rescue Committee 250,000 No further funds exp.
Universal Bank 160,000 Commercial bank
Church World Services (CWS) 145,000 No longer active
Citizens Association ALDI 125,000 No further funds exp.
Charles Stewart Mott Foundation 57,000 No further funds exp.
Fred Foundation 49,000 No further funds exp.
UMCOR 29,000 No further funds exp.
Solidarite 12,000 No further funds exp.
Total of Sample 97,213,000
Current Funding
The two major sources for funding in the past year have been the World Bank through LIP I
& II (see World Bank Initiatives for details) and USAID Business Finance. The World
Banks LIP II started in 2002 and has committed $23 million to nine MCO, which will be
disbursed through 2005. These funds may used for lending to micro borrowers. The largest
percentage of funds will be disbursed in 2003 and 2004. No additional loans are anticipated
at this time by the World Bank. The USAID Business Finance project provided lines of
credit to MCOs for on-lending totaling over $5 million. However, this project will be
terminated in the fall of 2003, and no further lines of credit will be granted.
Several MCOs have been successful in arranging commercial lines of credit. Raiffeisen has
been the most active among the local banks. The management of the bank stated that lending

to the MCOs has been both a way to have good quality loans and to attract substantial
deposits. The bank intends to continue its program of lending to the MCOs.
With the two largest sources of funding nearing the completion of their interventions, the
MCOs will have to rely on commercial sources for lines of credit. This puts them in a
position of having to borrow at commercial rates, which will raise their cost of funds.
Combined with the high cost of administering a high volume of micro loans, the borrowing
cost will put pressure on MCO management to carefully monitor their costs and margins.
The largest and most active MCOs have proven that whatever funds are available to them can
quickly be converted to loans. Therefore, as sources of funding become more difficult to
find, the ability to fulfill their mission of lending to the financially underserved will become
more difficult.
New Initiatives that Could Impact MCOs
Both the World Bank and the International Fund for Agricultural Development (IFAD) have
launched new programs that may have an impact on how the MCOs continue to function.
The World Bank is working to change the existing Law on Microcredit Organizations and to
create a new law on Finance Companies. The IFAD project is working on the creation of a
new law allowing the creation of Savings and Credit Associations. How these two initiatives
could affect MCOs is discussed below.
World Bank Initiatives
Because of the success of LIP I, LIP II was launched in 2002. The total financing for it is
$24 million. One component of LIP II is to continue to finds ways for making the MCOs
viable for the long term without NGO or donor support. The World Bank determined that
there are four basic structural forms that could be considered:
1. Microcredit Organization a basic form of non-profit, credit only institution;

2. Finance Company a form of privately owned credit only lending institution,
whose lending is not necessarily limited to microenterprises;
3. Savings and Credit Association a member-owned and governed institutional lending
form that would also be permitted to mobilize capital from its members in the form of
savings; and
4. Microfinance Institution (MFI) a form of specialized microfinance bank that would
be authorized to accept deposits from the general public.
To help accomplish the potential transformation into the above alternatives, amendments to
the current Law on Mircrocredit Organizations are being proposed. The current law is silent
on whether an MCO may invest in or become a shareholder in a for profit organization.
However, the legal counsels in both the Federation and the Republic of Srpska have
interpreted the law in such a way that prevents any investment or use of funds in for-profit
organizations. Therefore, the new amendments will allow MCOs to become funders of, or to
invest in for-profit, shareholder or member based organizations. The amendments are
expected to be completed and adopted by the end of September 2003.

Once the amendments are in place, then the World Bank will launch an effort to create a new
law that will allow for the creation of Finance Companies. To make this possible, the World
Bank will direct the development of a law to specifically support such a form of financial
institution. Because the current Law on Banking allows for Microfinance Institutions, as
evidence by the 4 year existence of Micro Enterprise Bank (MEB), they did not see a need to
address this form any further. The savings and credit association form of institution is
currently being examined by IFAD (see section on IFAD below). The World Bank has
agreed to support the IFAD effort on the creation of a law for savings and credit associations,
but agreed that IFAD should lead the design and implementation.
The amendments to the Law of Microcredit Organizations will not address how an MCO
should initiate a transformation, only that it may do so. The alternative structures will have to
be explored by the MCOs. They may decide to invest part of their funds into another
venture, but continue to operate as an MCO under the Law, or, they may decide to transfer all
of their assets to a new venture and leave the MCO as a shell. Or, they may decide to transfer
all assets to the new venture and then dissolve the MCO.
If an MCO elected to become a finance company under the new law being proposed, it would
be able to expand its product line. It would able to lend more than the current maximum of
KM 30,000 (Federation), extend terms longer than the current maximum loan or 36 months
(Federation), and not be limited to KM 5,000 on a borrowers first loan (RS). It would also
be able to lend to individuals in addition to entrepreneurs and micro businesses. However, it
would not be able to accept deposits, and would be obliged to continue borrowing funds for
lending. The finance company alternative gives MCOs greater flexibility but stops short of
giving them a much broader flexibility. This solution also does not provide the rural and
economically disadvantaged deposit and other banking services. Although this segment of
the population can go to a bank to receive these services, our findings indicate that most do
not. The MCOs have demonstrated their commitment to serving the underserved but are
prevented from expanding their commitment by the current law. Although the finance
company alternative is an interesting one, it does not provide the necessary flexibility that our
research shows is needed.
International Fund for Agricultural Development (IFAD)
The International Fund for Agricultural Development has completed two projects in the last
seven years in Bosnia and Herzegovina; the Emergency Farm Reconstruction Project and the
Small Farm Reconstruction and Development Project. Both focused on livestock restocking
in the aftermath of the war. The present project, Livestock and Rural Finance Development
Project, continues IFADs assistance to the livestock sector but represents a transition from
emergency aid toward sustainable development of the rural economy.
The overall objective of the project is to develop a replicable model of sustainable, small-
scale commercial livestock production which will demonstrate the income earning potential
of the livestock sector and contribute to the revival of the rural areas. To achieve this, the
project will help low-income, rural populations in the development of small-scale, private
sector, market-oriented livestock production with a view to generating sustainable increases
in household incomes, ensuring food security and contributing to the social stability and
prosperity of rural communities. Specific objectives are to:

Support the development of smallholder livestock production through the
provision of credit
Provide farmers with access to appropriate technical support services
Develop and improve linkages with the market with special reference to dairy
marketing
Develop complementary/alternative non-farm income earning opportunities which
support the provision of backward and forward linkages for the livestock
producers and contribute to the revival of rural services
Reconstruct essential rural infrastructure to provide an environment to which
people will return and pursue economic activities
It is under the last objective that IFAD has decided to support the development of a savings
and credit industry. Their goal is to help rural areas establish small saving and credit
associations (S&Cs) in which the farmers would be the members. The first obstacle to
getting this concept underway is the lack of a law under which such institutions would
operate. IFAD is supporting the development of such a law. The individuals in the
Federation and the Republic of Srpska (RS) Ministries of Agriculture have organized
working groups to draft such a law. Both groups decided to use the Croatian law as a model.
The BiH law is still in the drafting stage and is not expected to be completed until the end of
2003 or early 2004.
Another major hurdle to reaching their goal is the lack of a regulatory plan. They admit that
this is a very difficult problem. There are on-going discussions concerning what government
organization, i.e. the Ministry of Finance or the Banking Agency, should be responsible.
After this is determined, they will begin the process of drafting regulatory policy and
procedures.
Once these two major obstacles have been worked out, the Ministries of Agriculture
representatives overseeing the IFAD project will tackle the creation of small S&Cs. The RS
representative intends to create teams of locally hired consultants to go into the rural areas
and convince people to set up savings and credit associations. These teams will consist of 5
to 6 individuals, but their necessary qualifications and skills have yet to be determined. The
uncertainty of key issues and details of implementation seem to indicate that the first savings
and credit association is still a long way from becoming reality.
In the Federation the IFAD representative plans to solicit offers from NGOs to lead a project
to establish S&Cs in small towns and villages once the new law is in place. The NGO will be
responsible for presenting and promoting the concept and getting together enough potential
savers to form an association. The current Law on Citizen Associations requires a minimum
of 30 members. The Ministry expects that number to be a criterion to be used for the S&Cs.
At first, the association will only be for savings. It will be established on the municipal level
because a village level is too small. After it is established and has a base of savings, the
association may begin to make small loans. The first loan is expected to be about KM 1,500.
After a member borrows and pays back, he/she will be able to get more on the second loan.
The early members are expected to be recipients of the IFAD loans, but the association will
be open to anyone.
The Ministry representative clarified that they have not determined the market demand or
discussed the idea of savings with the borrowers. He does not plan to do that until after the
law is in place. In addition, he does not anticipate that the borrowers will have much savings

in the early part of the program, but hopes that as they acquire more cows, and begin
producing more milk, they will have more money for savings. He also stated that once the
law is in place, he will contract with an NGO such as CARE, World Vision, LOK, IRC, or
others to administer the program. Each S&C may receive a grant of KM 10,000 to help it get
started. He expects that the minimum number of association members necessary before
receiving the grant will be 30. He also explained that no funds will be needed for salaries of
the workers because they plan to have each S&Cs manned by volunteers.
The IFAD programs in both the Federation and the RS are primarily focused on agricultural
development. The creation of S&CS is a new concept for them and one with which the local
representatives have no experience. The S&C concepts that are they are currently
considering could create more problems than they solve. The lack of capital to properly back
even a modest S&C allows for no margin of error. A major function of capital in any
financial institution is the absorption of losses. The lack of a business plan or model is
another concern. The accepting of citizens deposits requires careful operations and a
minimum of protective procedures. The use of volunteers to run even a micro S&C of 30
members does not properly address this need. With 43% of the BiH population in rural areas,
micro size S&Cs will only scratch the surface of providing the deposit services that our
findings show will be needed. The larger MCOs with a capital of KM 3 to 8 million are a
much better starting point for providing deposit services than S&Cs starting out with seed
funds of KM 10,000. Our research indicates that the rural and economically disadvantaged
population need deposit services that are specifically structured to meet their requirements.
Most of the larger MCOs have been servicing this segment of the population for over 6 years
have a much better potential for providing expanded services than the new S&Cs being
planned by IFAD.
Both the World Bank and the IFAD initiatives are steps in the direction of providing more
services to underserved segments of the population. The World Bank LIP II Project will
provide for changes in the legal parameters which will make new structural options open to
MCOs. The IFAD S&C project will do the same, and, if successful, will also give a few rural
villages more options regarding financial products and transactions, including savings. We
should point out, however, that MCOs are already established, are strong, competent and very
able organizations, and that many of them are making a substantial amount of loans in rural
sectors. Thus they are currently well-placed to provide savings products in the rural arena. In
the following section, savings mobilization is discussed as a strategy that Bosnias MCOs
might use both to provide more complete financial services to underserved sectors of the
population, and to gain access to an economical source of funds for their lending activities.

SAVINGS MOBILIZATION AS A SUSTAINABILITY STRATEGY
It is only quite recently that the role which deposit-taking, or savings mobilization, can play
in the world of micro-finance has been recognized. Policymakers and development planners
long assumed that the economically disadvantaged segment of the population that turns to
micro-credit institutions did not have the capacity to save for if they did, why would they
need to make use of the small, relatively expensive loans that MCOs provide? This reasoning
was also fed by the fact that low-income people deposit very limited funds in formal financial
institutions such as banks. This seemingly quite logical argument does not consider the ways
that MCO clients reason, however, and overlooks the complex and sophisticated ways in
which they mobilize scarce resources.4 It also assumes that the financial products on offer are
appropriate to this segment of the population, that they feel welcome in formal financial
institutions, and find them convenient and agreeable to work with something that is
frequently far from the case.
From long being the forgotten half of financial intermediation in disadvantaged

communities (Vogel 1984), savings mobilization has now moved to the frontier of research
and implementation among micro finance practitioners. Based on evidence from research and
case studies in micro finance, it is now generally acknowledged that low-income households
will deposit surpluses in financial institutions if these are structured in a way that promotes
trust and offers their clients savings products that meet their needs. MFIs offering deposit
facilities can also accomplish greater outreach and have a larger impact than credit-only
organizations, in part because in economically disadvantaged societies, deposit services are
often in greater demand than credit opportunities; for while most economically disadvantaged
people want to save all the time, they only need to borrow occasionally.
Consequently, mobilizing savings can be of benefit to both MCOs and their clients. For the
MCO it can be an economical source of funds, and for the community it can be a needed and
appreciated service. Indeed, if it is to be a successful strategy, it must fill the needs of both
partners. It has been noted, too (Bdard 1992), that MCOs that lend in the areas where they
collect savings5 win the savings loyalty of clients for the valuable credit resources they
provide, and also have excellent repayment records because, for their borrowers, this is
warm money, collected from friends and neighbors, rather than the cold funds provided
by an institution.
4
In his introduction to The Mystery of Capital, Hernando de Soto points out how donors, via their focus, often
overlook the accumulation of assets by the poor: Charitable organizations have so emphasized the miseries and
helplessness of the worlds poor that no one has properly documented their capacity for accumulating assets.
Over the past five years, I and a hundred colleagues from six different nations have closed out books and opened
our eyes and gone out into the streets and countrysides of four continents to count how much the poorest sectors
of society have saved. The quantity is enormous. But most of it is dead capital. (2000:11) For de Soto, dead
capital is assets whose economic and social aspects are not fixed in a formal property system, and are therefore
very illiquid.
5
Instead of, for example, collecting rural savings and lending to urban populations with more stable incomes
and assets.

How do the Economically Disadvantaged Save?
Conceptually, disposable income is difficult to capture, as individuals and households can

decide to expand or limit their usual, or desired, expenditures depending on economic goals
and/or expectations concerning future developments. Spending, saving and investment vary
with time and circumstance, and take many forms as people strive to meet their needs. People
may decide to spend money that they cannot find a useful and safe way to store, and savings
may increase when such mechanisms or opportunities exist. Voluntary savings among low-
income populations take a multitude of forms. They can be held in cash, stored in the home
or other safe place, or in an institution (bank, cooperative, or a ROSCA - a Rotating Savings
and Credit Association).6 They can be held in-kind, for example, in grain or other non-
perishable crops, animals, gold, land, raw materials, construction materials, or finished goods.
The line between savings and investment can be difficult to draw in this economic
environment. A cow may be bought to provide the family with milk and the calf eventually
sold; building materials may be resold or used to construct or improve housing. Income can
also be lent to friends or relatives for economic or non-economic returns (social reciprocity,
status, influence over others decisions), and labor and favors can also be used in this way
giving a day of labor to get one back, or doing a favor for someone in the knowledge that it
can be called back, in another form, at another opportunity. All of these different forms of
savings have advantages and disadvantages that are well summed-up in a table presented by
Marguerite Robinson (2001:236). Here we present a version of her table:
Table 2 Types of informal savings (Robinson 2001)

Form of Savings Advantages Disadvantages
Cash -Convenience -Security problems
-Liquidity -Social expectations for use of cash on
hand
-Potential loss due to inflation or
devaluation
-Lack of returns
Grain and (some less -Hedge against poor crops -Storage problems
perishable cash crops, for - Some liquidity -Quality may deteriorate
example corn or potatoes) -Can be stored to wait for price -Community expectation that grain (etc.)
increases will be lent or given
-Can be sold in increments to smooth -Lack or returns if obliged to sell when
consumption prices are low
-May be used to feed animals -May be subject to international price
fluctuations
Animals -Generally high returns from -Opportunity cost of household labor to
propagation (especially pigs) care for animals
-Relatively high liquidity -Liquidity problems caused by
-By-products (milk, eggs, wool) indivisibility of an animal
-Animal labor available -Scarcity of grazing land or water
-Possible illness or death of animal
-Markets seasonal, prices fluctuate
Gold and other valuables -Liquidity -Security problems

6
ROSCAS are informal savings institutions that are common worldwide. A group of people who trust each
other agree to each save a certain sum over a specified time, for example, every month for a certain number of
months. Each month a different member of the group receives the collected amount, and uses it as s/he sees fit,
and then continues to save with the group until the end of the cycle. There are many variations on this type of
informal institution.

-Hedge against inflation and devaluation -Uncertain price fluctuations, possible
-Possible capital gains capital loss
-Can serve as status symbol -Lack of returns
Land -Rural: Source of livelihood, base for -Titling difficulties
enterprise, residence, or both -Rural: cultivation of small plots may
-Urban: Base for enterprise, residence or be risky for low-income households
both -Urban: Possible loss in case of urban
-Status symbol development
-Investment value -Variable liquidity
-Land taxes
ROSCAS -Generally secure -Can be risky
-Savings available in a lump sum -Not as useful for those who receive
-Social benefits from membership funds late in the cycle
-Mechanism for encouraging regular -Generally lack liquidity
savings -Vulnerable to collapse if managers
are corrupt, members are
undisciplined, or shock occurs
Raw materials and -Can be bought in bulk when prices are -Deterioration of stored materials
finished goods low -Need of secure storage space
-Can be stored and used as needed, or -Risk that materials become outdated
sold when prices are high -Lack of returns
Construction materials -May be purchased when prices are low -Security problems
and sold when they are high -Deterioration of materials
-Often the only option for housing -Risk of damage to partially
construction or renovation constructed buildings
-Lack of returns (unless sold at a
profit)
Lending to others in cash -Generally high returns -Limit on the number of borrowers
or kind from whom the lender can collect
-Transaction costs of making and
collecting loans
-Generally undiversified portfolio
-High risk at times of regional shock
or political upheaval
Labor obligations and -Provides supply of labor as needed for -Lack of fungibility
expected reciprocation for specific purposes -Uncertain returns
past contributions -Enables fulfillment of some social and
religious obligations without drawing
from more liquid savings
-Possible returns
What Robinsons table clearly shows are the many savings options open to people, especially
in rural areas, where land, crops, animals and rural labor broaden the realm of the savings-to-
be made considerably. In relation to their short- and long-term economic needs and goals,
people are continuously weighing costs, liquidity, the real rate of return on an option,
divisibility, security, the possibility of locking money away from potential loan requests, and
the prospect of using savings to gain access to credit or other services (Vogel/Burkett 1986;
Bouman 1994; Robinson 1994). In this context, transaction costs play an important role as
well; transportation fares to a financial institution, paperwork fees, and the time spent in
administration will affect propensities to participate in formal savings, as will any restrictions
on withdrawals.
The goal for a micro-credit institution seeking to mobilize savings, then, is to offer products
that the people in the communities in which they work will find credible, convenient, useful,
and attractive enough to add to, or partially replace their current forms of savings. The

informal savings options described above offer important advantages to people, including
quick return on savings in the cases where animals can be kept, forms of local status that can
bring long-term benefits, protection against inflation and currency devaluation. They will
always remain important options. However, convenient deposit services can offer people new
alternatives linked to different benefits than those of saving in-kind, such as liquidity,
security, returns, and possibly, access to other services of particular interest, such as credit.
For example, accounts that allow frequent deposits and withdrawals of small sums are one
product of great practical use to the economically active poor.
As MFIs generally know their clients and communities very well and are shrewd judges of
peoples character, sources of income, needs, and savings capacity (as clients must be able to
set aside income to repay loans) they are well-placed to design such savings products. All the
literature on savings mobilization recommends that the organization seeking to mobilize
deposits do extensive market research, design products with clients needs and convenience
as priorities, and test different products in pilot form in limited areas. Testing is particularly
important because it is very difficult to determine the costs of savings mobilization and to
adjust interest rates before such trials.
There are a variety of motives for saving, which in turn make people look for different
characteristics in the instruments they choose:
Table 3 Goals and priorities in savings

Client Savings Goal Priorities
Insurance against disability, illness, sudden income losses, -Safety
for retirement -Liquidity
To even out uneven income streams because of seasonal -Liquidity
variations -Overdraft credit
Wealth accumulation to finance long-term household goals -Safety
(social and religions, heritage, consumer durables) -Interest rates
Savings for investment -Security
-Immediate access in case investment
opportunity appears
Micro finance practitioners differ as to the importance of different formal savings product
characteristics for small savers. Regarding interest rates, some potential savers are
undoubtedly looking primarily for a safe place for cash savings, and will tolerate a low
interest rate, especially for small deposits. Others, with longer-term savings interests will be
more sensitive to interest rates. Yet others will regard savings that facilitate a loan as an
important incentive. Not only do such characteristics vary widely among individuals, they
also vary among countries and savings markets. Robinson (1994) points out that since the
demand for deposit facilities is driven by a mix of motives, it must be met with a mix of
products with different levels of liquidity and return.
When to Introduce Savings in Micro-credit Institutions
Based on research and experience, the Consultative Group to Aid the Poor (known as CGAP,
a member of the World Bank Group) makes recommendations as to when and how a MCO
should mobilize voluntary savings form the public.7 There are three basic conditions that
should be met:
7
Introducing Savings in Microcredit Institutions: When and How? CGAP Focus Note No. 8, April 1997.

There should be an enabling macro-economy with an appropriate legal and regulatory
environment, political stability, and suitable demographic conditions.
Good supervision of micro-finance institutions - all financial institutions mobilizing

voluntary savings should come under government supervision. Thus the government
must be willing to modify its banking supervision so that the rules for MCOs are
appropriate to their activities, and to provide the supervisory resources that assure
monitoring will be effective.
Before mobilizing public savings, a MCO should have demonstrated good

management of its own funds, be financially solvent with a high rate of loan recovery,
and be earning attractive returns.
BiH meets most of these conditions, and others are in process. The economic environment is
a positive one, with low inflation and a stable and trusted currency. The banking sector is
currently undergoing a healthy process of consolidation. The legal environment is being
addressed by two different initiatives, as we have seen in the previous section. There is
consensus on the importance of establishing a suitable and efficient regulatory and
supervisory framework in the event that MCOs begin to accept deposits, and good
communication exists between the entities that would undertake such a task. There is a large
demographic sector, particularly in rural areas, that is underserved in financial services.
Finally, the larger MCOs active in BiH have excellent rates of loan recovery, manage their
funds well, and are profitable. Consequently, the environment seems favorable for a
transition to deposit-taking.
CGAP notes that it is not unusual that MCOs interested in receiving savings need to address
legal and regulatory issues before they can begin to transform themselves into deposit-taking
institutions. They should also, as previously mentioned, conduct their own market research
on the demand for savings instruments within the communities they serve. It is important to
realize, too, that the introduction of commercial micro-finance has some level of political
visibility everywhere, and more so when savings instruments are added. Thus political
support at local and national level is useful for an institution pursuing deposit mobilization.
The lack of political and macroeconomic stability, as well as unsuitable legal and regulatory
conditions, will act as a brake on the mobilization of savings no matter how suitable the
products on offer. Discretionary government interventions, inflation and political distress all
tend to make households prefer informal savings options, especially savings in-kind, which
are able to preserve value in insecure times.
CGAP also points out, in the same document, that adding voluntary savings to a micro credit
program fundamentally changes the program and the institution. Savings are not so much a
new product, as an entirely new orientation. This means that institutions require extensive
preparation. Often, they find that savings accounts outnumber loans significantly, which
means the addition of many new customers, with corresponding increases in staff,
management, offices, systems, communications, security, and training needs. Staff must now
act as financial intermediaries, not loan officers; and the criteria for their evaluation and
promotion changes. The organization as such is faced with new requirements for cash
management, security, accounting, reporting, and supervision systems. Interest rates on loans
may also have to be adjusted to cover all costs and return a profit.

Based on experiences in other institutions, voluntary savings products (as opposed to those
tied to a loan) are more likely to be successful, and CGAP recommends that savings and
loans be kept separate. Also, the MCO should not try to teach its clients how to save, but
concentrate on providing the products that will capture their savings. Staff should be trained
not clients. When offering credit, a MCO selects the borrowers it trusts, but in savings
mobilization, it is the customer who must trust the institution. Winning this trust is a
substantial part of the challenge. The MCO must provide suitable products and must then
publicize them in a culturally appropriate way which makes good sense to their potential
clients.
Experiences
To date, there are few well-documented examples of MFIs that have been able to reach self-
sufficiency and maintain their lending activities solely through client savings and funds from
formal financial institutions (although credit unions have been doing this all along). As
indicated earlier, there has been a focus on micro-lending in the development context, and a
neglect of savings. One reason for this may be the fact that many MFIs begin their existence
as channels for funds from governments or donors to specific target populations, and do not
need to develop full deposit and other services for their communities. The need to report back
to a steady stream of donors, development practitioners and government officials can also
deform a micro-credit organization in terms of its being a financial institution, because it
tends to structure itself around these priorities to keep funds coming in, rather than focusing
on probing the needs of its clients and developing new products that can both serve them well
and function to protect the institutions assets (mainly the portfolio), as well as maintain and
increase the value of those assets.8 The transformation of credit-only MCOs into savings and
credit organizations is thus a relatively new phenomenon, and Jackelen and Rhyne (1991)
point out that MCOs with easy access to cheap discount facilities and donor loans may be
very dependent on donor subsidies and find it difficult to implement an institutional strategy
to mobilize local savings and otherwise build competitive and sustainable financial services.
Savings mobilization requires sophisticated risk and liquidity management capabilities. In

some cases, the risk-adversity of newly deposit-taking MFIs begins to crowd out small and
micro-borrowers, as institutions in transition prefer to give larger but better-secured loans.
There are difficulties in mobilizing micro-savings that may discourage MCOs from entering
the field; deposited amounts may be very small, and they may be volatile, especially in rural
areas due to harvest cycles and occasional crop failures. Administrative costs are fixed and
require economies of scale and scope. Innovative technical features may have to be included
to make deposit-taking cover its costs for the MCO and generate sufficient return to
depositors (Jackelen and Rhyne 1991). Fortunately quite sophisticated technical solutions are
available at increasingly reasonable costs, and there is a wealth of documented practical
experiences in mobilizing small-scale rural savings.
There are a considerable number case-studies and accounts available about experiences in
micro-finance institutions, but the majority of it discusses different perspectives on and
experiences in lending. The World Council of Credit Unions (WOCCU) publishes some
useful information on savings mobilization, however. Although credit unions are established
as savings and credit organizations at their inception, they are not always very successful at
8
Also, governance has been seen to improve when the leadership must answer to clients, depositors and
borrowers, rather than to funders.

obtaining deposits; and to that end WOCCU provides assistance and support. WOCCU also
works to establish credit unions around the world - together with USAID, for example,
WOCCU worked on establishing a network of credit unions in Poland in an initiative that
was unusually successful (Richardson and Evans 1999).
While credit unions may need to improve at mobilizing savings, they need not face the
challenge of transitioning from one type of structure to another. However, a gradually
growing number of organizations have been documented in making the transition from credit-
giving organization to savings and credit institution. The most recent examples include XAC
bank in Mongolia and MCOs in Uganda.9
A well-documented case of transformation is Banco Sol, in Bolivia, which successfully

evolved from PRODEM, a micro-credit organization, in 1992, when it received a base of
14,300 clients and a loan portfolio of four million US dollars from PRODEM. Four years
later, Banco Sol had over 69,900 loans outstanding and about 50,000 savings deposit
accounts. Along with clients and a loan portfolio, Banco Sol also inherited PRODEMs cost-
effective lending methods, motivated staff, and good reputation. However, the first four years
put substantial financial pressure on the organization as it grew. Commercial loans and
deposits were found to be substantially more expensive than donor funding, and Banco Sols
revenue generating capacity was inhibited by legal reserve requirements. They were making
larger loans, which earned lower effective interest rates. Their growth also became extensive
- resulting through the expansion of the branch network - rather than intensive growth,
resulting from gains in productivity due to innovation and better utilization of capacity. The
costs of the new branches were not compensated by an equally rapid growth in clients and the
total portfolio. Thus, as costs accumulated, the expanded capacity did not immediately
generate sufficient loans. It took time to realize potential, and as a result, it cost more to
disburse each loan. Banco Sol compensated by increasing the revenue-generating capacity of
each loan: it increased loan sizes and loan terms to maturity. Larger and longer-termed loans
produced more interest income without increasing operational cost per loan, and this allowed
Banco Sol to remain viable. In the beginning, the increase in loan size was policy-oriented,
and this search for better-off clients constituted a form of mission drift. However, as a
general policy, disbursing larger loans also caused repayment difficulties in some cases.
Subsequently, staff began to focus on issuing larger loans to repeat customers whom they
knew would have the capacity to repay, and to repeat clients who specifically asked for larger
loans, which is more of a reflection of a maturing relationship between client and lender.
Once the initial difficulties were won over, average loan size decreased again as new lending
relationships were established. (CGAP, 1997a). Banco Sol, then, successfully weathered its
transformation.
Another interesting case is that of Bank Rakyat Indonesia (BRI), a vast Indonesian institution
that has had an enormously successful recent history of mobilizing savings among the poor. It
was originally established as a state bank, and had always taken deposits although it did so
with very little success until it began to focus on the kinds of products that small savers
needed. It is a dramatic example of what can happen when an institution focuses on gathering
deposits by offering attractive products. Between 1973 and 1983, BRIs 3,600 unit desas
(branches) only mobilized about 18 million U.S. dollars. This, however, was due to a
government policy which required mandatory interest rates of 12 percent for loans and 15 for
savings, and a single savings product that limited withdrawals to two a month. When the
9
Personal communications, Ben Reno-Weber, formerly of CGAP and Janis Sabetta, of the Accelerated
Microenterprise Development Project (AMAP).

government deregulated interest rates in 1983 and BRI developed savings accounts that were
more appropriate, the bank mobilized massive, stable savings. By the end of 1986, the
branches had mobilized 3 billion U.S. dollars in 16.1 million accounts. Clients continued to
save through the economic and political crisis that began in mid-1997, with savings in rupiah
terms doubling during the crisis (Robinson 2001).10 (although the real value of their saving
decreased due to the decline in the value of the rupiah).
What is Relevant for BiH?
The experiences in other parts of the world are interesting and give an indication of what
might be possible in Bosnia and Herzegovina. However, these success stories are from
countries that are substantially different from BiH. They are far more populous, and in many
respects, less developed. The structure and history of their banking sectors differ, as does
their recent history.
BiH has an estimated 3.8 million inhabitants. It is a much smaller, less populous country than
others in the developing world, and its inhabitants are generally economically better-off. Prior
to the war of the 1990s, all citizens were covered by a national health plan and a well-
developed, rigorous educational system, and the benefits of these national services are visible
in the population today, which is healthy and well-educated. As part of former Yugoslavia,
BiH was an economically prosperous region that exported technology to the Third World
countries and could offer its citizens a basic level of economic security. The war devastated
the countrys industry, destroyed peoples security, and inflicted wide-ranging changes on the
population which have an impact on peoples strategies today.
The loss of life caused by the war has weakened many households economically. Beside the
dead and missing, there is now a sizeable physically disabled population, as well as many
displaced people, all rebuilding their lives in new environments. These individuals, and the
portion of the population that is jobless due to closed or decimated workplaces, are in many
cases the clients of the MCOs; people who are doing new and unexpected things in life,
making their way. Thus, in BiH there are many educated and formerly middle-class people
facing hardships and struggling to re-establish themselves. When the World Bank conducted
a pilot micro finance program in February 1996 they found that:
A new entrepreneurial class is emerging in Bosnia among the low-income people,

who are increasingly aware of the collapse and uncertain future of their former state-
enterprise jobs and the necessity of starting up their own businesses. While most of
these people keep to their traditional skills, some try to penetrate the imagination
barrier and develop new business opportunities.
(International Development Association 1996)
There are other consequences of the disruptions of the war. A substantial number of people
left the country during the war many of which have returned, and others who now form part
of a far-flung diaspora that has brought new ideas and information to their places of origin.
Those abroad continue to be sources of remittances and new impulses. They are channels that
allow Bosnians to be increasingly mobile, to access education, foreign jobs, and certain
foreign economic services, such as, in the financial context, foreign bank accounts. Most of
all, these contacts and networks enable people to compare what is available in their own
environment with what is available outside. Thus many Bosnians will be well-versed and
10
Although the real value of their saving decreased, due to the decline in the value of the rupiah.

discriminating users of financial services, particularly in comparison with many of the users
of MCO services in other countries. This means that the MCOs in Bosnia will have to be
sophisticated in the kinds of products, terms, service and security that they offer. It also
means that deposits may well be larger than those currently being mobilized in poorer
countries.
Bosnia also has an increasingly strong formal banking sector, thanks, in part, to donor input.
USAID has been particularly active in strengthening the financial sector of the country with
supervisory agencies, deposit insurance, lines of credit, and training. Thus, dependable formal
services are available to a broad population. Yet here, recent history comes into play. As we
shall see in our research use of the banking sector, although improving, is still not very high,
due to widespread wartime experiences of losing savings deposited in banks, unpleasant
experiences when contacting banks, poor service, and in some cases, current perceptions of
the political future of the country.
Another aspect of the total situation that should be considered concerns the very recent
history the destruction of the war. In Bosnia, half of the homes were destroyed in the war.
People fled, lost possessions, infrastructure, and savings. Thus, it is likely that a sizeable
portions of peoples excess liquidity inasmuch as they have it is going into rebuilding,
repairing, refurnishing people are investing to simply get back to where they were
economically before the war. This is a time of investment, and in this context, there may be
less money to put into savings but probably more need for small accounts and loan and
leasing services - as people start from a low economic level and gradually rebuild. As the
economic situation improves and reconstruction is accomplished, there is reason to believe
that savings will begin to grow. As it will take time for MCOs to make a transition and to
establish deposit-taking services, it would be wise for them to begin the process soon, in
order to be able to capture savings as these become increasingly available.
Micro-finance clients in BiH are quite different from the typical MCO client one reads
about in reports from around the world. In the first part of an evaluation being done by the
LIP II, the entrepreneurs that use the services of BiHs MCOs are portrayed. The average
entrepreneur is:
Table 4 Typical MCO Client in BiH

Age 40 years old
Married 75%
Male/Female 49%/51%
Annual household income KM 11,013
Annual per capita income KM 3,281
Education 11 years
Average loan size11 3,370 KM
However, according to the LIP II report, 43% of the MCO clients surveyed have a household
income that puts them below the poverty line, which, according to the Living Standards
Measurement Survey (LSMS) is 7,272 KM a year or 1,843 KM per person per year.
According to these figures, then, many approaching half MCO clients have very low
11
According to the LIP II Annual Report for 2002. The Bosnian MCOs vary quite a bit in their average loan
size, because their clientele, and the communities they work in vary. Although the average loan is 3,370 KM,
some MCOs average almost double that, and some substantially less.

incomes. However, since the average household income of the group as a whole is
significantly above the poverty level - 11,013 KM another substantial part of the clients
must be relatively well-off. (LIP II, 2003). One conclusion that might be drawn from these
figures is that there is a substantial amount of solidarity-group lending; many small loans lent
through groups; and also that a considerable number of clients might be sufficiently well-off
so that they might, in another economic context, be able to obtain bank loans.
To conclude, Bosnia is thus a somewhat different country in the context of micro finance
histories; small, once well developed, with an educated and financially quite sophisticated
population. The micro credits disbursed by the MCOs are relatively larger than in many
countries, and savings deposits might come to be larger as well. Sophisticated and
competitive products will be required, and may mobilize considerable savings as the
reconstruction process comes to an end. Regarding the experiences in savings mobilization
accumulated worldwide, much of it will have relevance for BiH since it deals with the
practicalities of market research, product design and delivery methods. The work to be done
in the legislative, regulatory and supervisory fields is, perhaps, more case-specific, although
in this area, too, there is a range of literature about practical experiences in other settings that
may be of good use.
In the next section of this report we will look at the market for savings in BiH. Do people
save, and if so, how? How do they regard the banks? What do they know about micro-credit
organizations? We will discuss both a broad sector of the public, approached through a
survey, individuals that partook in in-depth interviews and focus groups, and the clients of the
MCOs. Also, we will hear from the loan officers who spend their days in the field, finding
clients, collecting loans, observing and advising. This information will tell us about current
savings practices, and allow us to draw conclusions about the kind of market for savings
products that exists in the country.

THE MARKET FOR SAVINGS
The following section will review the findings obtained in the various forms of market
research that FSBAT has undertaken. In it, we will first account for the methods used in the
assessment, discussing their strengths and limitations. We will then review the major findings
in each of the methods used and discuss their implications for this assessment.
Methods Used in the Assessment
Savings are a sensitive subject in many societies. The meaning of the word itself appears
obvious to everyone, but as a concept and in practice, the act of saving is always embedded in
a local cultural context, making what people think, as well as what they do different around
the globe. The word itself is everywhere burdened with moral and emotional connotations.
There are the positive values of thrift and husbandry, which, at the opposite end of the
continuum, become the negative values of hoarding and greed. There are the often conflicting
desires to spend, invest, to enjoy life now - and the need to provide for ones future and for
the next generation. Depending on the situational context, people may decide to display
wealth and social standing, or reduce consumption and invest in less perceptible benefits.
Always, in amassing and deploying resources, there is the need, either spontaneous or
imposed, to establish a balance between the needs of the individual and those of the
community.
Such considerations make savings a multifaceted phenomenon. Savings are delayed

consumption, and consumption decisions are based on moral and emotional factors as well as
perceived needs. These are characteristics embedded in our mental make-up, and on one
level, people do not reflect very much about day-to-day resource deployment, what they
spend and what they save. On another level, they do, because trust in institutions, in the
state, in the future also plays a major role in shaping such decisions. Personal, family, and
community values interact with political variables such as the strength and agency -
perceived intentions and capacity for action - of both institutions and the state. The act of
saving is thus both profoundly personal and political.
Added to such complexities are the difficulties inherent in asking about, and talking about,
what is felt to be ones private business. People may be reluctant to give frank answers to
questions that probe their personal economic situation, and often, their deep frustration
concerning their possibilities and economic horizon. Each methodology has its particular
advantages and limitations. While surveys can cover large populations, the summary nature
of questions and the need for statistical formats may mean that results lack explanatory depth;
as the member of a discussion group, people may be reluctant to be candid, although group
dynamics can provoke useful discussions. Individual interviews on a sensitive topic are
dependent on the social situation in which they are held, the cooperation of the respondent,
and the skill of the interviewer.
Consequently, in this assessment we have used a variety of approaches, qualitative and

quantitative, to attempt to gauge the market for savings. We have spoken with the MCOs
themselves: their management, loan officers, and clients. We met with major banks, to hear
their views on savings and to measure their interest in serving the deposit and credit needs of
small clients and in rural areas. With the aid of local market research companies, we also
carried out a nation-wide survey, individual interviews, and several focus groups on the

savings habits and strategies of the public at large. We have approached the question with
different methodologies and from different angles in order to obtain an as complete, and
multi-faceted view of the prospects for savings mobilization by MCOs as possible. (See
Annex A for further notes on the methodology of the assessment).
Table 5 Methods of data collection used in this assessment
Method Time Carried out Goal

span by:
Conversations with MCO May FSBAT Information about the MCOs plans
management July for future sustainability and their
views on savings mobilization
Nationwide Survey (2900 June 6 FSBAT and Quantitative nationwide information
respondents) -July 9 Mareco Index about resource mobilization, savings,
Bosnia (MIB) and bank and MCO recognition
In-depth Interviews (36, held in July FSBAT and Qualitative information about
three locations, Mostar, Tuzla, 1530 Puls attitudes towards savings, banks, and
Banja Luka)12 MCOs
Focus groups (6, held in three July FSBAT and Qualitative information about
locations, Mostar, Tuzla, Banja 15-30 Puls attitudes towards savings, banks, and
Luka; 8 participants per group) MCOs
Focus Groups with Loan July FSBAT and Qualitative information about how
Officers (3, held in EKI, Mikrofin 15-30 Puls loan officers assess their clients
and Partner) with a total of 18 possibilities of saving, and how
officers savings might be mobilized
Interviews with MCO clients June FSBAT Qualitative information about clients
(held with a total of 26 clients July use of resources, plans for the future,
from EKI, Mikrofin, Partner, and attitudes towards savings
Prizma and Sinergija Plus)
Interviews with the July FSBAT Information about the expansion

management of selected banks plans of major banks and a few key
(MEB, Hypo Bank, Raiffeisen, smaller banks with a rural nexus
UPI, Zagrebacka, Volksbank)
Savings in Public Sphere: Quantitative and Qualitative Surveys
Defining Savings: Overview of the Findings
Bosnians have a tradition of saving. People will recount how they, as children, were brought
to the bank to deposit some money and received their first passbook. As adults, many
continued to save for larger expenses. In interviews, people would talk about saving or
classical saving which, to most minds, means saving in an account in a bank regularly,
depositing a certain sum every month, or on some other regular basis. Often such accounts
were used to accumulate money for consumption goals, such as buying a major appliance, a
car, or going on vacation. People also saved for their old age, and for their childrens future
needs.
12
Sarajevo was not included because we assume it is the best-served in respect to deposit possibilities, and
because we wanted to focus on more rural areas.

Thus, when we first began our research on the market for savings, and went out to ask
Bosnians if they save, we were asking a more specific question than we had thought. The
word savings was interpreted by informants as bank or passbook savings, while we had a
broader frame of reference in mind. By listening to responses and refining questions,
however, we were able to unravel the many ways in which saving is currently undertaken.
Yes, Bosnians have a tradition of savings in banks, and value this habit and such savings
highly. However, it is not the way in which most people currently save. It is much more
likely that people keep money within their homes today, something which is a reflection of:
the small size of the sums that they are able to accumulate
the precariousness of their economic situation, as reserves may need to be called upon
at any moment
their loss of trust in the banks due to the collapse of the banking system during the
war, and
the unpleasantness and inconvenience of visits to the bank.
A few save large sums at home due to a total lack of trust in the banking system, or make
arrangements to save abroad.
Also, there is a strong pattern of investment in order to save. Lacking trust in formal financial
institutions, people chose to put their larger reserves in real estate, either by building, or by
buying a house or apartment. This is also seen as an income-generating strategy, for houses
and apartments can be rented, and since prices are considered to be low in most areas, it is
also a way in which people hope to make a future return that can be higher than interest
earned in a bank. Investing in real estate or in a business is considered to be the safest way of
saving, safer than keeping larger sums of money in ones home, or in a bank.
Another way in which people save is in goods; and this is particularly common among the
MCO clients and small businesspeople interviewed in this assessment. They are constantly
reinvesting in their business when they are able; either by increasing stocks, investing in the
businesses machinery or premises, or by diversifying their activities. Buying inventory is a
way in which most MCO clients save; and in the rural setting people may invest in animals,
which can give much better returns than bank savings.
Thus one sees that today in Bosnia, savings primarily take the form of cash held in the home,
or of real estate or business investment, which is considered superior both because of income-
generating possibilities and general security. Finally, a form of savings which we quite often
heard about among people with steady incomes is life insurance. People buy a type of life
insurance that builds up cash value, which they view as long-term savings. They also have
the option of being able to borrow against the cash value of the policy for unexpected needs.
We began to see that an insurance plan (preferably with a foreign based company) is quickly
becoming an attractive alternative for part of the population, demonstrating again a wish to
save, but a distrust of local alternatives.
To sum up, although the BiH population has limited income today and people are struggling
to make ends meet, they are nonetheless saving in a variety of ways. Bank savings only make
up a fraction of the total. MCOs that strive to mobilize savings will have to work to re-build
trust in formal savings instruments. They can use their good reputations and the relationships
that they have built in communities to do this. Practically, they will have to offer products
attractive enough to their target groups to convince them to move funds out of their homes

into these products. Additionally, they will also have to offer long-term savings accounts with
market interest rates in order to attract the long-term deposits, for example, those of people
saving for a future real estate investment. Recruitment from the general population, and not
only clients, will be necessary because the entrepreneurs that MCOs lend to are more likely to
invest or circulate surpluses than to save them. Finally, effective regulation and deposit
guarantees will be a necessary part of winning the trust of the general public.
Below, we review the findings of each of the research methods used in this assessment.
MIB Market Survey Report
In mid-June, Mareco Index Bosnia (MIB) market research agency carried out a survey of
savings habits and bank and MCO recognition as a part of their monthly omnibus survey.
Face-to-face interviews were used, and the sampling was done between June 13th and June
22nd.13 A total of 2900 respondents over the age of 18 participated, 850 in the RS, and 2050 in
the Federation.14 The total sample was faithful to the ethnic and demographic structure of the
country; 43.4% were residents of rural areas, and 56.6% were urban. MIB is a Gallup
representative company and has a rigorous back-checking system to assure the quality and
dependability of its work. Here are some of the answers to selected survey questions posed:
When you have some money left over, what do you do with it?15
%
No money left over 53.3
Buy something for family/children/myself 21.2
Save at home (cash at home or other place) 20.7
Spend it to improve the home (house, apartment, etc) 15.4
Save in banks 10.9
I sometimes lend money to someone 5.8
Buy something that I can sell later when I need money 3.9
Other 1.7
We note, here, that a just over half the respondents said that they have no money left over
after monthly expenses. One fifth would consume the surplus, and another fifth would hold
the funds in the home. Only just over one tenth would place the money in a bank.
13
The questionnaire was developed in English by FSBAT and translated into Bosnian. A total of 18 questions
were submitted by FSBAT, and MIB asked 13 identifying and 10 demographic questions to situate the
respondents within the sample as a whole. The identifying questions sought information about gender, age,
education, marital status, working status, occupation, number of people in the household, the monthly household
income, nationality, and head of household vs. non-head of household. The demographic questions sought to
place respondents in the sampling area, municipality, canton/region, entity, urban/rural, month and day of
interview.
14
A minimum of 1200 to 1500 interviews are the recommended survey sample; in this case we were able to
acquire a significantly larger sample.
15
Respondents were allowed to chose more than one alternative to this question if they so wished. For example,
they could say that they both buy something for the family and save in banks.

How do you save for the future?
%
No money for saving 65.4
Save at home 23.8
Save in banks 11.2
Save in life insurance 1.9
Buying some realties/etc. (building, land, property) 1.9
Other 0.4
When asked how they save for the future, nearly two-thirds of the population replied that they
are not currently saving for the future. It is important to note, here, that the question was
interpreted as concerning long-term, fairly regular saving, which most people associate with
saving in banks. Of those who say they are saving for the long term, nearly a quarter save at
home, and less than half as many save in banks 11.2%. About 2% chose to save in life
insurance, and another 2%, in real estate.
In these two questions we learn that a considerable portion of the population is unable to, or
does not save. Since those who have no money left over at the end of the month, or are not
saving for the future were not questioned more closely, it is impossible to say, based on this
survey, if they are holding any emergency savings as reserves, although this may well be the
case. Yet of those who say they do save, however, roughly twice as many save informally at
home as save in banks. Home improvement and consumption compete heavily with funds for
savings; something which might be expected in a post-war society which is working to regain
pre-war living standards. These answers are an indication that there are substantial long-term
savings, as well as more short-term savings which are currently not being captured by the
banking system.
Those who do save feel that their savings are secure. When asked why, the overwhelming
majority said they felt safe because they keep their savings at home. Half as many feel secure
because they have their savings in a bank. Other reasons for feeling secure are having
invested savings in a business of ones own, saving in life insurance, or holding savings in a
foreign country. In a further question, 39% of those who do save indicated that they would be
interested in saving in some other way. This shows us that there is a potential openness and
interest in new savings products.
Why do you feel that your savings are safe?

%
I am keeping money at home 59.8
I am keeping money in the bank 29.4
I have put money in a small business of my own (goods,etc.) 4.7
I save in life insurance 3.6
I save in a foreign country 1.1
Other 1.3
MIB asked survey respondents if they have a savings account or any other type of account,
and 26% of respondents mentioned that they have savings account. Among respondents who
have no savings account (74%), 52% of them would like to open a savings account. Again,

we see the limited number of people who presently use formal banking services, yet an
interest in new formal ways of saving.
How do you use your account?

%
I have a business account (private business or salary account) 31.8
For long term savings, more than 1 year 25.5
I just use it to have money aside and always available 21.8
For short term saving, less than a year 16
Other 4.9
In these responses we can note that there is little long-term savings in currently-held bank
accounts, and that most respondents use their accounts simply to receive payments and/or
store money in a safe place, over shorter time spans.
The MIB report also shows that there is a substantial amount of borrowing and lending
among friends and family 31% or the respondents said that they had lent money to someone
within the last twelve months, and 34% said that they had borrowed from someone within the
same time period. This is an indication that there is a substantial supply of capital that moves
between people through informal contracts based on trust, and depending on need; funds that
appropriate savings and lending products might be able to capture.
To test bank recognition, survey respondents were asked to name up to five banks. While
98.5% could name at least one bank, only 13% named five. Three banks were named by 57%.
Not surprisingly, Raiffeisen Bank was first mentioned by the most people (16%) and
Zagrebacka second-most, with 9.6%. Hypo Alpe-Adria and Tuzlanska bank were third and
fourth, with 6.3% and 5.7% respectively. Other banks that were mentioned more than 5% of
the time were ABS, Kristal, Privredna, and Central Profit Bank. Interestingly, UPI bank rated
1.7% and Volksbank, 1.3%. A total of 36 banks were mentioned. This tells us that people
recognize a wide variety of banks, but relatively few can name five of them. It is an
indication of a lack of information about banks in general, and may mean that people do not
differentiate a great deal between different banks.
Regarding MCOs, recognition is low in the general public. Almost 68% of those asked could
not name a MCO, and 32.4% could name only one. Two MCOs were named by almost 7% of
the respondents. Prizma, Partner, Mikrofin and MI BOSPO are the most mentioned, and
those who had knowledge of MCOs had heard about them from friends or family members in
most cases (59.9%). 6.2% had borrowed from an MCO, and in 68% of the cases it had been a
good or very good experience. In 9.9 cases it had been a bad or very bad experience. The
very low level of recognition is most likely a result of the fact that MCOs provide loans for
micro-entrepreneurs, and most people surveyed are not in this category. It points to the
substantial amount of publicity that MCOs will have to invest in if they hope to collect
deposits from the public at large; at this point, many do not know that they exist.
Would you like to save with an MCO if you could, or is a bank better?
%

Do not know 37.2
Bank 26.7
None, it is better to save at home 18.4
None, it is better to buy something you need 14.6
MCO 3
Asked if they would like to save with an MCO if they could, 3% of all respondents said yes;
this is about half as many of them as had borrowed from an MCO. Just over a quarter of all
respondents said that it is better to save in a bank. However, most respondents did not know,
and there are sizable percentages who believe it is better to save at home or to buy something
one needs. The answer to this question reflects the low level of trust in banks, the very low
profile of the MCOs, strong habits of saving at home, and current consumption needs. The
large percentage of people who do not know is a reflection of a lack of financial
information in general, and by extension, of a lack of adequate products and marketing. It
points out the large amount of work to be done in the financial sector before the financial
needs of the population are served.
To sum up, what one discerns in the MIB report is that a large portion of the population does
not feel it is in a position to save, particularly in the long-term. A considerable number of
those who do save, however, keep their money in the home: a phenomenon that the events
surrounding the Euro-conversion has also brought to light.16 Just as foreign currency was
being hoarded before the conversion, it appears that the KM is currently being hoarded.
Twice as many say they save at home as in the banks, and those who do have accounts tend
to use them for short-term holding of funds. People recognize foreign banks, but they also
recognize a host of smaller local banks. While MCOs are clearly not well-known, nearly half
as many as have borrowed from them say they would be willing to save with them. People
are ambivalent about banks; while one quarter of the surveyed population believes it is best to
save in banks, only about a tenth of them do so. However, among current non-savers, there is
a substantial desire to open savings accounts, and to find new ways of savings.
We clearly see that there are sums among the public which MCOs could potentially capture,
if they were to mobilize savings. People are economically active in borrowing from and
lending to each other and are eager for new products. However, MCOs will need to invest
much more in information and publicity, and to offer products that are attractive and useful to
the many who do not currently use banking services.
Puls Qualitative Market Research - Individual Interviews and Focus

Groups
16
When the DM, to which the KM was originally tied, was being recalled and replaced with the Euro in the year
2000, deposits flowed into the banks. Bank deposits tripled between 31/12/00 31/12/0, and most of the increase
came in the last quarter. People were given the option of depositing their DMs (or other EURO-linked
currency) and having them converted to KM without paying an exchange fee. (Banking Agency of Federation of
Bosnia and Herzegovina, Information on Banking System in the Federation of Bosnia and Herzegovina as of
12/31/02).

In the last two weeks of July, Puls market research agency carried out a total of thirty-six
qualitative interviews in the Banja Luka, Mostar, and Tuzla areas.17 Interviews were face-to-
face, held in the homes of the interviewees, and lasted about 45 minutes. They were recorded,
and later transcribed by the interviewer.18 Parallel with the interviews, Puls conducted six
focus groups in the same three areas. Two groups were held in each area, one with urban
people and another with rural people.19 Eight people participated in each group. Because the
findings of the individual interviews and the focus groups both echo and support each other,
they will be discussed together. These interviews and focus groups were conducted to test,
clarify, and to give more depth to MIBs findings. They corroborate the findings in the survey
and set them in a context.
Savings Traditions and Current Practices
Puls interviews began with a discussion of the traditions of saving in BiH, and almost all
respondents agree that there is a tradition of savings in the country. People have always put
some savings aside, and have some savings regardless of their economic situation. However,
people emphasize the discontinuity in savings practices caused by the war. While prior to the
war they used formal savings institutions, since the war the economic situation has not
permitted them to save other than sporadically, and in smaller amounts. Also, people make
frequent references to savings that have been lost, and to the fact that that they were
outwitted, betrayed, and swindled by the banks, and have lost trust in these institutions.
Therefore, people tend to keep their savings hidden in the home, and to accumulate them first
of all for emergencies. Although they put money aside when possible, all too often these
savings must be used for pressing expenses, and then recuperated. One might say that savings
held in the home belong to a conceptual world of disaster, and some of the names for savings
reflect this, such as black fund, and saving for God, dont let it be.
The words that used to refer to savings are very telling:
Za ne daj Boze meaning God, dont let it be

for dark days
aside or on the side
stek or ustekati (younger people) a hidden place
usparati (elderly people) an older expression meaning to save
hide from oneself
pawn
in the bag
stockings
17
Twelve interviews were carried out in each area; half with urban residents and half with rural people. All
interviewees were economically active, either as small business owners or employees. They were heads of
households, and made the economic decisions in the family. Twenty-eight men and eight women were
interviewed; they were between the ages of 25 and 55. FSBAT originally asked for a larger representation of
women, but this was difficult to obtain due to the local cultural norm that the man of the house represents the
household to the outside world. Thus, women are more difficult to approach unless they are household heads.
However, this in no way means that women are less active in financial decisions; indeed, we were told that it is
quite customary for a man to turn most of his monthly salary over to his wife to administrate.
18
The interviewees in Mostar did not agree to be recorded, so in this area one interviewer asked questions and
the other took notes.
19
All focus group participants were economically active, between the ages of 22 and 55, and were the ones
making the economic decisions in the household. A handful owned small businesses, and again, more men
participated than women. The questions were designed by FSBAT, and translated by Puls.

under pillow
underneath the carpet
slamarica an old type of mattress made of straw
tie/knot to fool oneself and save that way
saving-worth gold
cekmedja (older people, in the Mostar area) meaning stashed away
All of these expressions are passive, speaking of funds that are guarded, even from oneself.
Funds are set aside, hidden, tied up for safekeeping. People also say that it is difficult to talk
about savings because there is nothing to talk about, and in some circles the word is not
mentioned at all, because nobody believes in it, and there is nothing to say. However, the
wide variety of words and phrases used to describe money set aside confirms that most
people do have special funds for a variety of purposes even though they do not call it
savings.
Some people keep savings at home because they are safer there. Others point out that this is
money that can be needed on very short notice, and that it is only small amounts, not enough
to be worth the trouble of taking it to a bank. Yet others see savings more generally as the
process of collecting money, and they collect it for various ends: simply to be able to pay
bills and survive, for consumption goals, for a medical or financial crisis, or to be able to
invest in something in the future: real estate, a business venture. People frequently point out
that it is necessary to save for their children and their future, for the coming generation.
Those with businesses tend to save specifically for the business, and point out, for example,
that Money needs to be invested, and that For me, investment is savings. In both
interviews and focus groups it was apparent that investment in a small business opportunity
or in real estate is deemed the safest and most productive way of saving at this point in time;
partly because such investments will always bring in some income. Those in business save to
expand it, to acquire new tools and inventory.
Of the 36 interviewees:
Seven have money in the bank, but also have other forms of savings, in a business or
real estate
Twelve say they keep savings in cash at home, and for two of them, it is their only
savings
Five hold savings only in goods
Five say all their savings are in funds invested in their business
Half are saving for a specific purpose, often to start a business or improve an existing
business
Younger people are more likely to be saving for a vacation, for a home, or to pay back
a loan, or to reject savings completely as being too much of a sacrifice
Others save for no reason in particular but for their children and the uncertainty of
the future
Only two respondents of 36 believe that it is safer to hold money in a bank than to hold it at
home. Those saving at home are split in their opinions as to the safety of their savings, but
more of them feel safe than do not. Money is safe because it is in my home, or in my
pocket, and because home is safer than the bank. Those who feel unsafe holding money at
home emphasize the rising crime rates, but some of them keep their money at home anyway,

just to have it always available. One respondent replied, I do not know. My savings are
not safe in the bank and they are not safe like this, either.
Most focus group participants do not think that saving in a bank has any great benefit for
them today, and the distrust created by past bank experiences does not make banks a safe
haven for hard earned money either, in many peoples eyes. Some say they are forced to
keep money in a bank, because they receive salaries or pensions there, or because they are
afraid to keep it at home. Here, as in the interviews, people express interest in saving abroad,
and some say that is the only safe way to save.
Puls asked interviewees if they would like to save in some other way. Ten respondents are
satisfied with the way they save at the moment. Most of them hold cash at home or use
savings to buy inventory for their businesses. None of them have bank savings; some do not
even consider saving in a bank. Yet almost half of the interviewees express a wish to save in
a bank or in life insurance. They will consider saving in a solid, safe bank; the security of the
bank is their primary concern. Other possible ways of saving respondents mention are
investing money in something, investing in real estate, handling money, and buying
means for production. Puls quotes one farmer in the Tuzla area:
I would like to trust banks as I did before the war; and now, if I had money, I would
put one part aside, but the majority of it I would invest and turn it over, taking into
account that it s a better way of saving than keeping it in a bank.
The following table sums up some of the points above:
Table 6 Prewar and postwar financial conditions and ways of saving

Prewar Postwar
Regular incomes Irregular income or lack of income
Regular savings Irregular or no savings
Savings mainly for the future Savings mainly for emergencies, and when possible, for
and for consumption goals the future
Banks play a fundamental role Limited contact with or trust in banks
in savings

Savings kept primarily in Savings kept primarily in the home
banks
Limited entrepreneurialism Investing in a business as a form of gaining income and
savings
Home construction important Home reconstruction important, investment in real estate
seen as highly desirable
Easier to borrow from banks Borrowing and lending takes place mainly between family
based on steady income and friends, much less borrowing from banks, some
borrowing from MCOs
In Annex B, we present the answers that the 36 interviewees gave to the question How do
the people you know save?
Extra Income
Puls asked interviewees what they would do with money (500 KM) left over at the end of the
month, an amount that they did not need for their daily activities.20 In most cases, business
owners will invest it in their business in some way. A significant number of others will leave
the money aside; sometimes with a clear, stated goal, but often just for the security that the
sum gives them as a reserve. In a majority of cases (22 of 36) this money would be kept in
the home. Two respondents opt to save the money in the bank. Although many interviewees
had previously expressed the desire to start a bank account, when they have the money, they
choose other options. 21 Most younger respondents say they will spend the money on a party
or some similar diversion.
Almost all interviewees will readily lend the 500 KM to their friends or family, if they feel
the borrower is in need of it. Conditions are given, such as lending only to best friends, close
family members, those who need it for health reasons, and so on.
Emergencies
When asked what they would do in an economic emergency related to their work or business,
half of the interviewees said that they would borrow money, probably from a financial
20
We chose the sum of 500 KM when we designed the question, thinking that this is an average monthly salary
in BiH. We wanted respondents to react to a sum that was within their sphere of reference, and neither very
large nor very small. However, most respondents pointed out that this sum was far too small an amount of
money, small cash, money that means nothing, and money that one can not do anything with. This may
have been primarily in relation to some of the choices given, such as investing in a business or repairing the
home.
21
In the focus groups, participants were asked what they would do if they suddenly had 1000 KM. A larger sum
was used here, since the interviewees thought that 500 KM was an insignificant sum. However, 1,000 KM is not
considered to be much money either. The most frequent response was that it was little money nothing at all
and that it would be quickly spent on the 1,000 holes in the house, meaning utility bills, house-related
priorities, childrens needs, replacing identity papers, basic needs, and personal items. In many respects this
response resonates with what one focus group participant in Mostar said: We are a nation of debtors. There is
not one of us who does not owe money to someone. Exaggerated, perhaps but indicative of the pervasive
feeling of not being able to keep up with expenses, not being able to generate enough to cover the needs of a
solid, decent family life. Some focus groups were also asked what they would do with 5,000 KM, and here,
the answers were nearly always investment-oriented, with most indicating that they would invest in a business,
save (opinions varied between bank and private savings) or invest in real estate.

institution. Most respondents view of banks was quite critical, however. They see banks as
having high interest rates, difficult terms, complicated procedures, long process, and
requiring guarantors and/or collateral. In contrast, many viewed MCOs as being more
efficient, having simpler procedures, and demanding less in the way of collateral and
guarantees.
Fewer respondents said that they would borrow from a friend or family member. However,
when asked about their lending habits two thirds said that they had lent to either friends or
relatives in the previous year. This last finding continues to confirm the fact that people have
funds available but do not refer to them as savings.
Selling property was seen as a last resort in difficult times; but people would sell cars,
apartments, office space, whatever they had that could best alleviate the situation. Few spoke
of activating their savings. The question that remains is if this was because of a lack of cash
savings, or because of an extreme reluctance to make use of the black fund for God dont
let it be, - after which, perhaps, there are no more alternatives?
Recognition and Trust of Financial Institutions
The majority of the interviewees said that they felt they could trust banks with their money,
despite the fact that few of them use banking services. In focus groups, the characteristics that
make a bank good were discussed. The security of deposits was the primary concern.
Thereafter, people cited:
Terms of loans (interest rates, conditions)

Terms of savings (interest rates, forms of savings)
Quality of service (kind, professional, communicative and efficient staff)
Quality of organization (simple paperwork and procedures)
Another issue brought up in focus groups was that of information. Participants were not
Tuzla region Mostar region Banja Luka region
Tuzlanska banka, Raiffeisen bank, Razvojna banka,
Univerzal banka, Zagrebaka banka, Kristal banka,
Raiffeisen bank, Hypo-Alpe-Adria-Bank, Raiffeisen bank,
Zagrebaka banka, Volksbank, Banjaluka banka,
ABS banka, Univerzal banka Zagrebaka banka,
Union banka, Zepter banka
Profit banka,
MEB banka
satisfied with the information available concerning savings and loan possibilities in financial
institutions in general. They feel it is done poorly, and that the information does not reach
them.
The banks which interviewees named most frequently when asked which banks they had
heard of were:
Almost all interviewees said that they had a relationship with one of the abovementioned
banks, and in most cases this was a company account, established for their business
transactions. Banks were chosen on the basis of the recommendation of someone they know

(17) or the proximity of the bank (12), and, less importantly, the particular services provided
(6). This indicates that personal recommendations and relationships, as well as convenience
are significant factors in shaping peoples financial choices.
The MCOs and their activities were much less well-known than banks. Very few respondents
were well-informed about MCOs. Most knew about them in general but could not name any
and lacked concrete information about their activities.
The MCOs that interviewees had heard of were:

Tuzla region Mostar Region Banja Luka Region
EKI PRIZMA MIKROFIN
MI-BOSPO MEB (is a micro bank) SINERGIJA
PARTNER
Half of the interviewees (18) had not been in touch with either a bank or an MCO within the
last year to talk about savings or a loan. In most cases, people wanted information about
loans, and were more satisfied with the credit opportunities at MCOs than at banks.
When asked if they would consider saving with an MCO, it became apparent that
interviewees and focus group participants will consider it, because they feel that MCOs and
banks turn money over in a similar manner. The interest rates, savings terms and other
benefits offered are of interest, however; informants said that they would carefully consider
the deal they are offered.
To sum up, the largest number of financial transactions in Bosnia appear to be carried out
among family and friends. In an environment where the financial intermediaries cannot or do
not respond adequately to peoples needs, social ties become vital economic resources. A
wider variety, and wider access to savings products and loan products would give people
more room to maneuver within the existing system, and would serve to move some of the
financial transactions out of the informal (person to person) sector into more formal (person
to institution) channels.
The findings of the qualitative research provide a number of reasons why people do not save
in formal institutions, and give greater insight into the way people make personal economic
decisions. They indicate that despite the economic difficulties faced by most families, saving
is going on, and informally held funds do exist and can be captured with adequate savings
products.
Savings as seen from the MCOs Focus Groups with Loan Officers
The loan officers that are in daily contact with MCO clients and prospective clients have an
excellent point of departure from which to consider the forms in which people save, and the
probability of attracting savings to their organizations. We decided to ask for their
perspectives as part of our assessment. Three MFIs (EKI, Mikrofin and Partner) were asked if

they would cooperate with us, and allowed us to arrange focus groups with some of their loan
officers. The sessions lasted for about 90 minutes each, and were led by a facilitator supplied
by Puls Market Research Agency, who later transcribed the tapes for FSBAT. Here, we will
only highlight the main points that came out in these focus group discussions.
Savings
Loan officers generally agree that people are saving, when they can; but sums are low and
kept at home, although confidence in banks is improving. Generally, there is a trend among
clients to save in property rather than in cash; for example by buying a car or an apartment,
which is considered more secure than holding cash either at home or in a bank. Some loan
officers indicated that the Euro-conversion clearly demonstrated that many people are
keeping money out of the banks, and that the issue is not so much one of the ability to save,
but of confidence in saving institutions.
They emphasized that income made in business is reinvested and constantly circulating. Loan
officers from branches in the countryside recounted how people tend to have something in
their yard, something planted, sometimes animals. These clients do not think of going to a
bank, but put extra money into something productive: animals, a tractor, a vehicle, land.
Their way of savings is the result of a long tradition, and of the concrete, practical knowledge
they have about how to increase revenues in the rural sphere. In urban areas, too, small
entrepreneurs are continuously trying to think of ways to diversify their operations and to
enter new areas of business. When they have a cash surplus, their primary concern is how to
circulate it for the best profit. Some loan officers felt that this made them unlikely candidates
for savings products, as they can generate more profit by investing in their businesses.
The loan officers also discussed savings as a personal habit some people might have a high
income but not put any money aside, while others, who apparently had almost nothing, would
have some savings. There is a general agreement among MCOs that about 30% of MCO
clients have a capacity for regular savings, while the rest are struggling to get by most of the
time. However, this 30% primarily keep their savings at hand. Perhaps about 5% of them
save in a foreign bank such as Raiffeisen or in Austrian life insurance companies. Successful
MCO clients are also reaching for pre-war living standards, and profit goes into rebuilding
and refurnishing homes, educating offspring, and sometimes setting them up in new
economic enterprises.
Loans as Savings
There were interesting observations on how clients sometimes took loans and regarded them
as a form of savings. Indeed, loan officers noted that if clients pay back loans on time, then
that is an indication that they are saving, since they are putting earnings aside for
installments. Some officers pointed out that probably such clients could pay back a little bit
extra on their loans, and start a savings account that way. However, a number of clients view
borrowing specifically as a mechanism allowing them to save, or to protect their savings.
Table 7 How entrepreneurs use loans to create savings
A client will: Why it makes sense:

Take a loan and put it in the bank This is a way to turn part of the inventory into a lump
although he does not need it, when he sum of cash and to pay it back gradually through the

has a large inventory sale of the inventory
Use a loan as working capital although he He can work with other peoples money and keep his
has savings savings for an emergency, or pay back the loan from
inventory sales, turning the loan sum intonew savings
his own capital
Take a loan in an emergency although He can keep the savings for another emergency, or as
one has savings a reserve to pay back the loan
Take a loan to aid a kinsman although he The existence of a formal contract with a financial
could use his own savings for this institution exerts pressure on the kinsman to repay
purpose quickly
Take a loan although he has no The existence of the MCO loan makes it easier to
discernable need for one refuse loan requests from friends and relatives, and he
may be able to repay it from his earnings and save the
sum
Loan officers found some such practices absurd, considering the interest rates that clients had
to pay. They conceded, however, that this way of doing things made sense to clients because
of personal difficulties in saving, the need to concentrate values held in inventory, to
counteract the tendency to spend from the daily income of a small business, to cope with loan
requests from friends and family and simply to increase and protect savings.
When people run into difficulties, loans can be more attractive than using hard-won savings.
People who have a fund saved for a particular goal may eagerly take a loan to cope with an
unexpected expense rather than touch this money which has a different designated
destination. Loan officers also noted that women were more likely to save than men, that they
were better savers. They explained how people with seasonal incomes, especially in
agricultural occupations saved in different forms to smooth consumption over periods in
which they had little or no income. And they pointed out that many people today are saving
out of fear. There is little security businesses do not function well, salaries are irregular,
people are uninsured, and they must think about the costs of education and health needs.
They simply must have a reserve. Yet it was interesting to note that many loan officers did
not regard such reserves as savings; that they, too, equated savings with formal bank
instruments, with regular and more substantial deposits in savings accounts.
The Relative Strengths of MCOs in Collecting Savings
Opinions are mixed among loan officers regarding how MCOs can attract peoples savings,
and the success they are likely to have. Trust is considered to be a key issue, and in that
respect, they point out that MCOs are respected for their hands-on daily practices, their
demands of prompt repayment and immediate investigation of delays. Clients say that this
shows that they really care what happens to the money they lend, and it increases their
respect for, and trust in the organization. One point generally agreed upon is that MCOs are
well able to compete with banks on the terms of friendliness and confidence, and that the
relationships that they have built in communities will serve them well. However, it is also
recognized that clients are well-informed about the different terms and benefits on offer in the
marketplace, and that they will, in the long run, opt for the most attractive returns. Some may,
at first, measure returns in kindness, efficiency, and ease; but these will not be the only
competing points. Asked on what basis they can compete with banks for savings, loan
officers replied:
Their direct contact with the public
The trust that clients demonstrate in them

The pleasant and friendly atmosphere in which they deal with clients, including home
visits (especially compared to clients usual experiences in bank)
The personal relationships that they have built with clients and communities in which
they work
Their knowledge of their clients and their savings needs
However, officers also point out that good personal relationships will not be the only
necessary ingredient in future savings mobilization. Clients will expect useful products with
good conditions that can compete with those of other financial institutions.
One of the most interesting things these focus groups reveal is how clients use loans with
multiple, personal motivations. Loan products are not always simply used for business
investment needs. Funds may already exist in the business or the household, but be locked
away, earmarked for another purpose, or for ultimate security. Thus while money, a social
construction, is fungible, it is also non-fungible in particular, personally constructed
situations. There are circumstances in which it is worth paying interest in order to preserve
savings intact, to provide oneself an incentive, and situations when a loan can play the role of
insurance: keeping savings intact in the face of emergencies or outside demands.
Finally, MCO loan officers acknowledge that their clients are well informed about financial
alternatives (compare with Puls focus group participants, who did not feel that they were
well informed). This tells us that MCOs will have to be astute in offering savings products
that can effectively compete with other offers and with the attraction of in-kind savings. In
addition to accounts that can be mobilized frequently, they will have to offer products that
can successfully compete with market rates for long-term savings. In this context it is
important to remember that people usually prefer to save in a variety of ways, and seek a
combination of long-term and short-term savings vehicles that have a coherence for their
individual situation.
Interviews with MCO Clients
During the months of June and July, we conducted interviews with 26 MCO clients (from
EKI, Mikrofin, Partner, Sinergija and Prizma) on their savings and investment habits and
future plans. They were asked about the history of their business, how they got started, and in
what ways they save, or plan to save. The interviews were conducted at their places of
business, and the loan officers responsible for their loans made the introductions, and were
often present during the interviews.
The meetings with MCO clients enabled us to obtain a more complete picture of the way
people are deploying economic resources. In questioning and listening to these small
entrepreneurs, we were able to understand economic decision-making in its context, and
obtained a framework in which to make sense of information. The interviews were also
valuable as a way of observing economic activities in different parts of the country,
especially rural activities, and the people that make up the growing ranks of entrepreneurs.
One thing that became apparent is that city people, who used to work in urban, and in some
cases international jobs before the war, are some of the new entrepreneurs in the countryside;
in the current absence of urban employment, they are using rural properties to launch new
enterprises. In general, Bosnian MCO clients seem to be a well-informed and discriminating
group, many of whom would, provided larger and cheaper loans, be able to expand their
businesses more efficiently. Those we spoke to all named prior savings as one of the inputs

that allowed them to start a business, along with, in many cases, the savings of one or more
family members, sometimes family members no longer living in Bosnia.
Savings from the Perspective of the Entrepreneur
Business expansion is the entrepreneurs primary concern. As the loan officers indicated in
the previous section of this assessment, they keep their funds circulating, reinvesting in their
enterprises. Few have any use for bank accounts. Those with registered businesses (non-
agricultural clients) all have business accounts because they are so obliged by law, but they
do not save in these accounts. Only one respondent, an urban shop owner, admitted to having
a bank account containing money that I do not touch. Her husband was saving in life
insurance. Business accounts are established in banks that are convenient because clients or
suppliers use them, or because they are located nearby, and these banks do not tend to be the
new foreign banks that achieve the highest recognition ratings in Puls research, but rather
smaller, local banks. Many of these entrepreneurs have some savings put aside, but prefer to
keep them at home, or in the pocket in the event of an emergency or a sudden opportunity.
The bank failures of the war years were mentioned in every interview, most emphatically in
the RS, as another reason why saving in banks is not attractive.
If MCO clients do not save as such, they are certainly constantly investing in things that are
forms of savings. Besides expanding their businesses and buying stock, they often set their
offspring up in business, sometimes in one that forms a type of economic synergy with their
own. Indeed, some entrepreneurs said that they originally started their business because my
son was unemployed and I wanted to help him; and the father-son team becomes an efficient
partnership. In this context, entrepreneurial profits also pay for weddings, buy automobiles,
contribute to homes for offspring, and build or improve the owner home or business
premises, including factory space.
Even when business expansion could be financed with savings or earnings, entrepreneurs like
to work with borrowed money and have my own on the side. This is a strategy which we
also saw reflected in the conversations among loan officers. It seems irrational to pay a high
interest rate and keep saved funds passive, but for some, it has its own rationality. One
entrepreneur said that this happens because of fear people simply prefer to lose MCO funds
to their own savings, in an emergency. Perhaps they do not have complete confidence in their
enterprise, or, as he pointed out, in the future of the country and the economic parameters in
which they are operating. In such a case one might equate the interest paid on such loans as a
kind of insurance fee for keeping ones own funds high and dry, or as a micro-
entrepreneurial country risk cost, an economic measurement of some peoples lack of faith
in the future.
Relationships with the MCO, and the Issue of Savings
Although MCOs are appreciated for fast access to a loan without need for collateral, feelings
are also mixed. MCOs are constantly criticized by clients for their high interest rates, and
there is little understanding of why their rates need to be higher than those of banks. Also, the
small size of loans provided are frustrating to many who would like to borrow more and
expand faster. Some entrepreneurs feel doomed to MCO loans; for one reason or another
they cannot get a bank loan (time, collateral requirements, their business is not wholly on the
books) and they are faced with a long series of small, high-interest MCO loans. There seems

to be a concrete need for larger loans, longer terms, and lower rates would, of course, be
appreciated.
When asked if they would save with an MFI if this service was available, the answer was
almost always affirmative, but in a yes, why not way it is not a service they have been
looking for, but they would consider it. These businessmen point out that they have a very
good relationship, or cooperation with the MCO, and that it has a good reputation in the
area. These are positive things. However, they also say that it would depend on what they
were offered such as interest rates; better rates on savings than offered by the banks, and/or
lower rates on micro credit loans. They would consider their MCOs savings product as one
more on the market, and use it if it served their purposes, if it provided a good opportunity.
Nearly all respondents pointed to this consideration, to the deal. Some say they would test
the MCO, putting in a bit of savings and waiting to see the results before committing more
resources. Thus MCOs will have to work hard to attract their business clients to their savings
products, and it may well be the case that their main savings market will be non-
entrepreneurial clients.
Conclusions
Savings are a fluid medium. Savings and borrowing flow into one another, are two sides of
the same coin. One can save in order to borrow, or borrow in order to save. People use bank
or MCO products ingeniously, inventively, shaping them for their own ends, giving them
new meanings. Savings, like consumption, are adjustable, and reflect not only sacrifice but
also trust and faith in the future.
In Bosnia, people are saving even when they say that they are not. They are keeping sums
aside in event of an emergency, lending to friends and family, investing in their homes and in
household durables. Although they have a tradition of bank savings with passbooks, few are
participating in that type of savings today. Rather, money is kept at home, just because sums
are small and not deemed worthy of bank deposit, and because of a lack of trust in, or lack of
ease in banks. However, holding cash at home brings difficulties too; the pressure to lend or
share, the temptation to spend spontaneously, the possibility of loss or theft, and the lack of
returns.
Having a sound, transparent banking system is crucial to build faith in the economic system,
to encourage savings and investment. But it is not enough. People must believe in the
legitimacy of the system, and banks must also offer the kinds of products savings, loans and
other that are deemed useful by most people. This does not seem to be the case today. Many
people of the social sector that MCOs work with are not being attracted to deposit their
available funds in banks. Finally, faith in the larger political community and in the project
of being a nation is also essential, and this is apparently something which, among some, is
still questioned.
How do people reason? How do they make choices? In many different ways. People can
simultaneously espouse parallel and conflicting rationalities. Like the man who is not
superstitious, but chooses not to walk under the ladder, the man who basically trusts the
banking system may still keep his money at home. He who looks for the highest interest rate
may choose the bank with the lowest, because it has a foreign name, or leave his money with
an MCO that treats him in a familiar and easygoing way. Yet in the long run, in aggregate,
people will choose the products that benefit them the most, are useful to them, and that serve

their needs. Different products from a variety of providers can serve them best at different
points of their economic progress, can give them more alternatives, and multiply the
possibilities of establishing trust.

MICRO-CREDIT ORGANIZATIONS, STRATEGIC PLANNING, AND
THE QUESTION OF DEPOSIT-TAKING
An important part of FSBATs assessment of the issue of deposit-taking for micro-credit

organizations in BiH has consisted of visits to the MCOs and frank discussions with their
executive directors. We chose to visit the eight largest organizations, and also included one
smaller, well-run entity. Our conversations indicate that most MCOs are presently in the
process of conducting research and planning for their futures, and few have made firm
decisions as to the course they will pursue. They have similar interests and concerns
regarding deposit-taking, and approach it as a complex and demanding possibility.
Many organizations indicate that they have studied the issue previously. In some cases, this
occurred as they were establishing themselves as MCOs, in the process of setting up
operations, designing products, and negotiating for the approval of the laws on MCOs in the
two entities. While some note that they were approached by clients asking for deposit
services in the late 1990s and gave the question consideration then, others have been brought
to examine the idea more recently, as they sought to develop new products for their clients.
Several organizations, especially the larger ones, point out that the current structural and legal
parameters for micro-credit organizations in BiH limit them to a static existence. As the
directors of Sinergija Plus expressed it, Microcredit organizations are the only financial
institutions that have no room to grow. They can expand, but they cannot grow. This is a
reflection on the difficulties they experience in designing a variety of products to attract new
clients, and to develop with their old clients by offering them new possibilities as their
businesses evolve and their needs change. Thus, MCOs are today examining the possibilities
of providing micro-insurance and micro-leasing, and there is wide interest in the provision of
deposit-taking services.22
Several MCOs stated that they have, from the beginning, considered the current institutional
framework a temporary one, a transitional form. A few have decided where they want to be
heading, while others are actively considering possibilities, conducting market research
among clients, conducting discussions or negotiating with possible future partners. Current
size, funding possibilities, origins and mission statement, and the ambitions and competence
of key management all play into the decision-making process. While the MCOs are sovereign
institutions with their own agency and goals, certainly the activities and decisions of major
BiH donors and NGOs have substantial impact on them, and influence their decisions as well.
As of today, several MCOs are operating partly with credit lines from Raiffeisen Bank, at
interest rates which vary from 8,5 to 10%. This is considerably more expensive than donor
sources of funding. Most of the early loans and lines of credit ranged from no interest loans
to loans averaging about 3%, and for terms of 3 to 7 years. Now, it remains to be seen what
effect more commercial loans, and less donor funding, will have on these organizations. One
phenomenon which we observe is that the need for collateral to offer as a guarantee for
commercial lines of credit is encouraging and obliging some larger MCOs to move into
premium office space; within the past year, Sinergija Plus, Partner and EKI have all acquired
22
Micro-insurance is insurance for micro-credit clients, and is often life insurance. It can function as a savings
vehicle. Micro-leasing involves issuing contracts granting use or occupation of property during a specified
period in exchange for a specified rent. The leased object usually functions as collateral, and becomes the
property of the client at the end of the lease term.

new office space to house their headquarters, and cite the need of collateral as an important
reason for their decisions.
The World Bank is suggesting that one formula for future sustainability for MCOs may be for
them to transform into finance companies; something which will necessitate legal reforms in
order to allow them to move from non-profit to for-profit status. Such a new structure would
allow MCOs to develop new loan products and to serve a wider sector of the public, since
they would no longer be limited to providing loans for businesses or income-generation, and
they would also be able to lend larger amounts, possibly for longer periods, something which
several are eager to do. MCO directors express concern that such a transformation may lead
to mission drift, however; that shareholder pressure may oblige them to make only the most
profitable, secure loans. Merging with a bank, or working with a bank as a strategic partner
raises similar concerns; fears arise that the MCO will lose autonomy and come to serve the
needs and goals of the bank, thus no longer being able to focus on their target populations as
they best see fit. One way around this problem is for a MCO to become a micro-bank on its
own, meeting banking agency requirements. Mikrofin has indicated that they would like to
head in this direction, and others may also be interested.
As mentioned, there is wide interest among the MCOs in deposit-taking. However, few of
them have made any deeper examination of the issues involved, and the demands that such a
project would put on their organization, nor have they conducted any studies as to the extent
of the market for savings products. A couple of organizations plan such research in the
coming months. It appears that the main thing holding others back is the current legislation
which prevents deposit-taking, and the belief that changing the law will involve lengthy
negotiations. Indeed, some MCOs indicated that they did not have any confidence that they,
as a group, could successfully lobby for legal changes; and that consequently dedicating time
and energy into planning for deposit-taking would, at this point, be an unprofitable
investment.
The MCOs interested in deposit-taking regard it with caution. They all see it as a long-term
project that will put big demands on their organizations, and feel that they are not ready for it
yet. Some have, however, made investments in IT capacity and in infrastructure which will
enable them to move in this direction, should it become possible. They are also working on
building trust among their clients for savings products in the future. They see regulation as a
given which must be put in place, and stress what a catastrophe it would be, if MCO deposit-
taking should result in the failure of one or more of their institutions: the entire sector would
lose credibility. Deposit insurance is also considered to be important, and the general feeling
is that MCO deposits must be guaranteed in a way similar to bank deposits.
No one doubts that there are potential deposits out there to be collected. Several MCO
directors named the inflow of foreign currency to the banks during the Euro conversion as
proof of this fact. This was an inflow of currencies held by the general public outside of the
formal banking system; and there is reason to believe that a substantial number of people
save in similar ways in the local currency, or in monies that were not affected by the Euro
conversion.
But other indications of potential deposits also came up repeatedly during our conversations
with MCO directors. The most important of these, which also appeared constantly in
interviews and focus groups with the general public, is the wide lack of trust in the banking
system, which leads people to save cash in their homes instead of in the banks. While foreign

banks are attracting increasing amount of deposits from the public, they are not attracting
long-term deposits, and our survey indicates that they are not attracting them uniformly
throughout the country. MCOs believe that the relationships that they build with their clients
in the communities where they are active will be a strong basis on which to construct the
confidence necessary to receive deposits. Most do not believe that they would receive large
sums at first - rather it is likely that they would receive many small sums; but with time,
small deposits will grow into an important base for sustainability. Important questions here
are whether deposits should be received only from clients, or from the public at large, and if
they should be voluntary or a prerequisite for a loan.. The majority of the MCOs interested
would like to collect voluntary deposits from the general public, and research in other
countries also indicates that this policy is by far the most successful, if competent oversight
and regulation is in place.
MCO directors point to other phenomena, as well, when speaking of potential deposits. They
all have excellent repayment rates, and note that even when their clients have economic
emergencies (such as the recent drought in the RS, which affected farmers) they repay their
loans, which shows that they have resources on which to draw. Some will prefer to take a
loan despite the fact that they have already saved the amount they are borrowing, indicating
the high value placed on cash reserves.23 Another signal of savings cited by managers is the
large amount of construction underway in the country as a whole, and the large homes being
built some people prefer to put their surpluses in bricks, rather than risk losing them in the
banks.
Finally, an important counterpoint to trust in the financial system is faith in the government,
in the powers of the state as a whole; and the lack of this faith in the BiH was also named, in
a few conversations, as a serious impediment to a normally functioning financial system.
People feel that the political situation is ill-defined, and may be subject to change. Until
people believe in their state and the future of their country they will keep their own counsel
and be wary of where they entrust their resources. Trust in local organizations and individuals
built up through close contact will, in such a situation, be more appealing to a certain part of
the population.
We turn now to a review of the characteristics of the MCOs consulted in this assessment, and
the highlights from our conversations with them. For a more complete review of discussions
with each MCO, please see Annex C.
Microcredit Institutions in BiH
23
The liquidity and possibilities inherent in holding cash provides people with a psychological sense of security
which was well described by Simmel: Since money is not related at all to a specific purpose, it acquires a
relation to the totality of purposes. Money is the tool that has the greatest possible number of unpredictable uses
and so possesses the maximum value attainable in this respect. Thus the value of a given amount of money is
equal to the value of any object for which it might be exchanged plus the value of the free choice between
innumerable other objects, and this is an asset that has no analogy in the area of commodities or labor. Money as
a pure instrument represents their highest possible synthesis because it has no specific quality for a specific use,
but is only a tool for acquiring concrete value, and because opportunities for using it are just as great at any
point of time and for any object. The superiority of the owner of money over the owner of commodities results
from this unique quality of money as being unrelated to all particular characteristics of things or moments of
time, disassociated from any purpose, and a purely abstract means. (Simmel 1990:212-214.)

The following table shows twelve of the most active MCOs in BiH. All but two, Prizma and
Micro Aldi, are participating in the World Banks LIP II Project. For the purpose of this
Assessment, eight of the largest plus Mikro Aldi were interviewed.
Table 8 Economic overview of interviewed MCOs
EKI Ms. Sadina Bina, Director
EKI is interested in accepting deposits but has not done any serious research on the
question because of the existing legal hurdles.
Ms. Bina believes that this would be an excellent way of raising funds, and feels sure
that EKI can capture funds in the communities they serve.
A move into deposit-taking will involve a great deal of preparation and pilot projects.
Regulation and oversight, as well as deposit guarantees are essential to savings
mobilization.
More concrete knowledge about what such a transformation involves is needed.
EKI would also like to offer other projects such as money transfers and micro-
insurance, so as to be able to grow with their clients.
Partner Mr. Senad Sinanovic, Executive Director
Partner has yet to make a decision as to future sustainability strategies.

The organization is currently embarking on a process of examining clients needs for
new services and products and will cover the eventual need for deposit services and
micro-insurance.
If a need is found, Partner would like to offer savings products to the public-at-large,
not only to their clients.
Mr. Sinanovic believes there are savings to be recruited, especially in rural areas, and
that Partner is well-positioned to receive deposits because they are convenient,
accessible, and have built trust in their dealings with clients.
However, they have no experience in the field of deposit-taking, and would appreciate
support.
Mikrofin Mr. Aleksandar Kremenovic, Director
Mikrofin is currently a self-sustainable organization but is actively seeking a new

structural form in order to be able to increase lending activities and offer more
services to clients.
They are considering becoming a micro-bank or other deposit-taking institution.
Mr. Kremenovic believes that it is possible to attract deposits, and expects that they
would be small at first and grow gradually. Mikrofin can grow a deposit base by
offering different products and relating savings to lending.
The organization has made preliminary preparations for deposit-taking by investing in
business premises and in their IT system.
Laws and regulations must be changed if the envisioned transformation is to take
place, and there must be supervision of MCOs that accept public monies, thus new
regulatory bodies should be put in place.
Help from the OHR and/or USAID in facilitating legal changes will be very welcome.

LOK Mr. Nusret Causevic, General Manager
LOK is currently considering different options for sustainability, but has yet to come
to a firm decision as to their future. Accepting deposits is of interest, but a danger at
this point, since none of the MCOs in the country are ready for it.
New laws need to be in place, and supervision and deposit insurance are also
essential.
One way to move forward would be for an MCO, or a group of MCOs, to associate
with a bank or a microfinance bank in order to take deposits. This strategy might
circumvent some legal hurdles and also make the transition to deposit-taking easier on
the organizations.
MCOs have an important role to play in carrying on a dialog with the public about the
importance of savings.
In cooperation with Triglav, LOK has recently introduced a new loan product with a
savings element (life insurance) that has been very popular with clients, indicating
that there is a need for savings products.
Investment and support will be needed and welcome if LOK, or other MCOs, are to
successfully convert themselves into deposit-taking institutions.
Micro Sunrise - Mr. Milan Seselj, Financial Manager
Micro Sunrise is currently in the middle of a 5-year strategic plan which includes
funding sources and will take them until the end of 2005, and is not currently
considering changing structure.
Mr. Seselj believes that accepting deposits is problematic and would require a great
deal of work. The fact that many banks have failed in the region compounds
difficulties; as does the fact that the law does not permit MCOs to accept deposits.
If laws were to be enacted permitting deposit-taking by MCOs, Micro Sunrise would
absolutely be interested.
Restructuring to mobilize savings would be complex but they have a good
infrastructure and an adequate IT system in place to participate in such a
transformation.
There are uncollected savings in the public sphere, especially in rural areas.
MCOs have a bright future, and will continue to serve smaller communities and
businesses which banks find unprofitable; they serve different sectors of the
population.
Mi-Bospo - Ms. Nejira Nalic, Executive Director
Mi-Bospo is undergoing a period of investigating different options regarding future

sustainability, and has consulted with several banks concerning a partnership, and
with other MCOs concerning a merger. No decision as to the future has yet been
made.
The organization, which serves women entrepreneurs, is interested in accepting
deposits if there is a client need for this service, and sees it as one way to secure cash
flow for the organization.

It would be a problematic process, and one that they have not prepared to undertake
now since it is prohibited by the current law.
Regulation and deposit insurance would be necessary.
Recent research conducted by Mi-Bospo indicates that clients are very sophisticated
in their choice of products.
Ms. Nalic believes that although clients do not save in banks at this point, banks are
expanding; thus it is increasingly likely that clients will begin to trust and use banks
as the conditions in the country improve.
Prizma - Ms. Maja Gizdic, Executive Director
Prizma is currently undertaking a strategic planning exercise and would like to

expand their services to include deposit-taking, micro-insurance, and micro-leasing.
The current legal environment does not permit leasing and insurance, but the latter
can be provided by teaming-up with existing insurance companies, acting as their
agents.
Accepting deposits is more difficult due to the legislative changes required and would
also lead the organization into an entirely new arena, in which they would need to
upgrade their knowledge and marketing capacities.
The question of deposit insurance would also be important, as would how to work
with the received deposits.
Regulation would be essential to assure citizen confidence.
Prizma has conducted a few focus groups with their core clients, and concluded that
some are eager to have savings products. Thee is a need for smaller accounts, and a
reluctance on the part of clients to use the services of the banks in the area.
Sinergija Plus - Mr. Zeljko Bogdanic and Mr. Milord Dokic
MCOs today have little space to develop. They can grow and serve more clients, but
they cannot develop as financial organizations because they are by law only allowed
to offer loans.
Areas in which they could successfully operate include accepting deposits, offering
leasing services, larger loans, or micro-insurance.
Sinergija Plus is interested in being able to accept deposits in the future; but first they
must become economically stable, with sufficient capital.
The market that MCOs are serving is changing, and most are expanding in rural areas
now, where banks are less active or successful.
There should be room for diversity in the future scenario for MCOs. Not all
organizations will want, or be able to move in the same direction.
Sinergija Plus would like to be able to serve the demonstrated need for larger loans,
up to 60,000 KM, and for longer terms five to six years.
The experiences of the Euro conversion proved that there are funds held by the public,
and the recent drought also indicates this as their severely affected clients are not
defaulting on agricultural loans.
A trusted institution in which to save would be valuable for their communities, since
people are building and consuming partly because they do not trust the banks.

Mikro Aldi - Ms. Ferida Softic, Executive Director
Mikro Aldi is examining future strategies because they have been turned down for
donor funding from USAID (Business Finance) and the World Bank (LIP II) because
of their small size.
They have been in initial exploratory talks with UPI bank and Raiffeisen, but are open
to other alternatives and have yet to make any decision as to the organizations future.
Ms. Softic would like Mikro Aldi to remain independent for as long as possible, and
believes that some of the small MCOs will be able to survive.
Some of the larger MCOs may be able to mobilize savings, but in moving in this
direction they will become more like banks, and their mission is likely to change.
Mikro Aldi primarily provides solidarity group lending in a very economically
depressed area. Many of their loans are for agricultural purposes, and they have
substantially more demand for loans than they can meet.
With the funding currently available to them and their present interest rate to their
clients (16%), they can cover their operating costs, but not capitalize.
Table 9 Main Points of MCO Interviews Summarized
MCO EKI Partner Mikro- LOK Sunrise Mi- Prizma Sinergija Mikro
Fin Bospo Aldi
Has decided on x
a new strategy
Is maintaining x x
current strategy
Is examining x x x x x x
new
possibilities
before reaching
a decision
Is interested in x x x x x x x x
taking deposits
as a new
alternative
Believes x x x x x x x x x
savings can be
captured by
MCOs
Has made some x x x
preparation for
savings
mobilization
Stress the x x x x x x x x x
importance of
regulation and
supervision

See the current x x x x x x x x x
Law on Micro-
credit as a
hurdle
Plan to expand x x x x x x x
services and
products
Point to a need x x x x x x x
for information
on savings
mobilization
Desire support x x x x x x x x
in an eventual
trans-formation
process
What this chart indicates is that most of the MCOs interviewed are in the process of making a
decision about their futures. Only Mikrofin has made the decision to transform their legal
structure, while Sunrise has a 5-year plan that it is sticking to for now, awaiting legal reforms
in the Law on Microcredit. Generally all MCOs feel limited by the current Law on
Microcredit, and would like to offer more services to their clients than now possible. Most of
the organizations are interested in savings mobilization as an alternative, and believe that
there is a market for savings products, but due to the legal situation only three have made any
investments in this direction. They all believe that regulation and deposit insurance are of
great importance to the success of such an undertaking. Most complain of the lack of
information on the issues and investment involved in accepting deposits, and all that are
considering the move feel that they would need support to make the transition. Thus, we see a
concrete need for state-of-the-art information for these institutions, and a broader discussion
as to the legal and practical issues involved, possible solutions at individual and group levels,
best practices, and the costs and benefits of mobilizing savings as a strategy.
Legal Framework
When the Law on Micro Credit Organizations was established, the MCOs were set up as non-
profit organizations that only lent funds which were borrowed or permanent capital (grants
and surplus revenue after expenses). There was no provision for MCOs to accept deposits.
Therefore the regulation of MCOs was assigned to the Local Initiative Department under the
government-created Employment and Training Foundations (EFT) established to administer
three employment-related programs financed by the World Bank and other donors. LID
management is responsible to a Board of Trustees and ultimately to the government. A
separate LID was established in both the Federation and the Republic of Srpska.
The LIDS act like an apex or second tier institution channeling financial and technical
assistance to the MCOs at the retail level. They have four main roles:
Provide and monitor financing to the MCOs
Evaluate the development of the MCOs and provide them with technical assistance
needed to manage their resources soundly and become independent financially viable
institutions
Improve the legal framework for the microfinance sector in BiH
Disseminate information on microfinance best practice to all micro lending
institutions in BiH and participate in local and regional professional microfinance
associations

Performance monitoring and financial analysis are conducted on a quarterly basis. All
financing is performance-based. In order to remain eligible for financing, MCOs are expected
to meet mutually agreed Performance Standards, which provide targets and incentives for the
development and growth. The expectation is that all MCOs that meet the Standards will
continue to grow and be financially viable institutions and increase their outreach to low-
income clients.
Because the MCOs do not accept deposits, they are not as tightly regulated as banks. The
donors who help set up each MCO with grants and loans are expected to serve on the
respective boards of directors and monitor the effective use of their money. However, a failed
MCO does not have the same impact on public trust as a failed bank, which causes the public
to lose their savings.
Regulation
All MCOs interviewed indicated a strong need for proper regulation in the event that they
were allowed to and began taking deposits. They recognize the importance of protecting the
public trust and to comply with their fiduciary responsibility of accepting the publics
savings.
If MCOs were allowed to begin taking deposits, a great deal of thought and planning would
be needed to determine the best way to regulate them. Some have suggested that the
monitoring and regulation could be performed by the existing Banking Agencies. However,
the Banking Agencies are reluctant to take on this task because of lack of personnel and the
expertise. The mission of banks is quite different from that of the MCOs, and therefore, their
lending practices and performance criteria are also quite different. For example; most micro
loans are unsecured, but in banking this would be highly unusual. Most micro loans are for
business purposes, but the borrower is not always registered as a business.24 Banks are
reluctant to lend for business purposes unless the borrower is properly registered. These
requirements would place such a burden on micro borrowers who most would decide not to
submit their loan application. One suggestion has been to create a separate division within the
Banking Agencies with different policies and procedures that fit the style of lending common
to micro credit.
The current initiative by IFAD to set up Savings and Credit Associations is also grappling
with the regulation issues. The two working groups have discussed these concerns but have
not arrived at a solution or recommendation. Both representatives admit that the issue of
regulation is a significant dilemma.
Deposit Insurance
The issue of deposit insurance, like regulation, is a universally accepted need for MCOs if
they begin taking deposits. Even though all MCOs agree on this issue, no serious planning
has gone in to how it might be accomplished. The management of each MCO interviewed
pointed out the problem of trust created by the collapse of the banking system during the war.
They also pointed out the benefit that deposit insurance for banks has created with the
24
Agricultural producers are not legally required to register a business, nor must all small, income-generating
activities be registered.

substantial increase of deposits in those banks that have been accepted into newly created
insurance program.
The deposit insurance system for the banks in BiH required substantial grants from donor
organizations to begin operation. The banks that have been accepted as part of the program
have been determined to be financial fit and able to contribute to the insurance fund, which
should insure it continued function. Because of the small size of the MCO industry, the
amount necessary to start an insurance fund would be substantially less than the banks, and
the amount that it could contribute would also be quite small. However, the amount of the
average deposit would be far smaller than in banks, and therefore insurance per deposit
account could also be less than the banks. The details of such a plan would require additional
technical assistance and close coordination with regulatory agencies for the banking system.
The World Bank is focusing its attention on amending the current regulations and creating a
law governing Finance Companies, and is therefore not considering the issues of regulation
or deposit insurance. The IFAD initiative to set up S&Cs is focused on creating a law and has
not yet considered deposit insurance. This is an issue that would require serious thought and
planning before MCOs are allowed to begin accepting the publics money.
Conclusions
Every MCO interviewed expressed some interest in savings mobilization. Some are making
decisions that could help prepare them, such as upgrading their IT systems and beginning to
conduct research. However most consider the existing legal framework a major hurdle. They
are waiting for legal changes before making any serious investment in time or resources.
They all regard taking such a major step as transitioning to accepting deposits with
considerable caution. They understand that they would become custodians of public funds
and have respect for the importance of that position in their communities.
Everyone voiced the need for quality regulations and supervision. All believe that some form
of deposit insurance is needed. However, most do not intend to spend much time on the topic
until the current law has been amended and new laws are in place for Savings and Credit
Associations. Several expressed the concern that even if the laws are changed, they would
still be reluctant to make a transformation to accepting deposits without outside help. They
see the need for help with the conversion of existing locations, staffing, training, marketing,
and IT systems. Despite their awareness of the obstacles, they are all very interested in
examining the possibility of receiving deposits.
All MCOs are committed to serving their markets for the long term. Each voiced a desire to
maintain their current mission and to find ways to be sustainable over time. We found the
MCOs we interviewed to be well managed; they have strategic plans, good financial controls,
and are profitable. They value training and the need to constantly upgrade the skills of their
lenders and management staff. We think their caution is prudent, and that it will serve them
well in the event that they decide to begin mobilizing deposits.

BIH BANK EXPANSION PLANS
Banking in BiH has experienced a major restructuring in the last seven years. After the break
up of the former Yugoslavia, the banks collapsed and the remaining pieces were splinters of
the former large banks. BiH, a one point, had 73 banks serving a population of 3.5 million.
The reforms, consolidations, and entry of foreign banks have resulted in a much stronger and
viable banking system. All but one of the foreign banks entered the market by buying existing
banks. With the help of capital from the parent organizations some banks have launched
aggressive expansion plans. Other banks have plans to expand in the very near future. In
order to consider the impact of future expansion of banks on the markets that maybe be
targeted by MCOs if they begin to take deposits, a representative sample of banks were
interviewed. The following is the results of those interviews.
Banks
The management of six banks were interviewed for this assessment. These six banks range
from the largest to medium and small. The six banks interviewed represent 63% of the
deposits in the banking system. The following table gives an overview of their balance sheets
as of year end 2002.
Table 10 Overview of balance sheets of interviewed banks
Bank Assets Deposits Capital

(000 KM) (000 KM) (000 KM)
1,079,00 910, 73,8
Raiffeisen (including HPB) 0 338 50
990,73 840, 80,0
Zagrebacka (including Universal) 3 176 82
689,50 86,8
Hypo Alpe-Adria (including Kristal) 0 546,300 00
223,04 178, 26,6
UPI 7 030 23
156,08 104, 29,9
Volksbank 6 526 06
80,34 19, 18,2
MEB 8 582 62
3,218,71 2,598, 315,5
Total of banks interviewed 4 952 23
2,224,05 1,537, 496,2
All other banks (26) 1 240 76
5,432,76 4,136, 811,7
Total Banks (37) 5 192 99
Below, we schematically account for the main points that came out in the interviews. For a
review of the interviews, please see Annex D, Summaries of interviews with general
managers of six selected banks concerning their plans for expansion.

Raiffeisen Bank
Has 50 banking outlets and considers expansion plans more or less complete; is in the
process of consolidation
Believes that rural areas are more cash-oriented than bank-oriented, and that the level
of distrust is high
Is contributing to micro-finance by being the lender to the micro-credit institutions
Is not very interested in making small loans; 30.000 KM is considered small at the
Sarajevo office
Feels micro-businesses lack of collateral, lack of registration (rural activities) and the
need to monitor micro-credits make this branch problematic
Would be interested in mobilizing rural deposits (as small as 1,000 KM) but has no
current strategy for this market
Zagrebacka Bank
Was recently acquired by UniCredito Banking Group and is currently in the process
of restructuring (and merging with Universal Bank)
Will have 57 branches, some of which are redundant and will be eliminated
Is changing its strategic plan and will expand service in rural areas, especially those
that show financial strength due to investments in the agricultural sector
Will focus on SMEs, which are seen as potentially more profitable than the largest
clients
Believes that micro-businesses present some problems because they often cannot meet
banking stipulations on collateral or other regulations and it can be difficult for them
to find co-signers
Believes that banks, especially those that are foreign-owned, have an advantage over
MCOs in gaining the trust of clients; MCOs should focus on reducing the risks of
lending to micro-businesses
Hypo Bank
Is merging with Kristal Bank of the RS and will have 55 banking outlets; the goal is
to have a branch or outlet in every community of 5,000 or more
Is in the process of installing ATMs in smaller towns and villages at the rate of 20 to
30 a year for the next few years
Concentrates on urban areas and individual loans and plans to become a consumer-
focused bank
Provides a non-restricted loan of up to 25,000 KM secured by a home mortgage, and
encourages loans secured by cash in the bank
Has plans to become a major credit card issuer
Believes that savings vary widely from region to region depending on past economic
history, and notes that the rural market was well-developed before the war due to the
number of private enterprises in rural areas
Believes that post-war reconstruction efforts (people getting back to status quo)
absorb much of the funds that might otherwise be placed in savings

MEB Bank
Is a micro bank with 8 branches and 3 satellite offices countrywide

Has a strong capital base and did not, until recently, need to focus on developing
deposits; has an 80% loan to deposit ratio
Will now concentrate more on developing the deposit base; the manager believes that
there are substantial deposits to be obtained, especially in rural areas
Plans to focus more on rural markets, because most of their clients are urban-based; is
expanding generally
Is moving into the SME lending market
Is currently conducting a survey on customer service
Is concerned over the substantial increase in consumer loans throughout the banking
system; will now take a more conservative approach toward consumer lending
UPI Bank
Has 6 branches and 6 satellite offices

Is currently analyzing each office for profitability before deciding where to further
expand; does not plan to open new offices at present
Receives its greatest deposit growth in the major markets such as Sarajevo, and does
not anticipate much deposit growth from the rural areas
Volksbank
Currently has 6 branches with 125 employees

Is focused on developing its central operation and has, in the last year, embarked on a
strategic plan to open branch offices throughout BiH, opening 4 offices in 2003. Will
open 3 branch offices per year in 2004 and 2005, with the goal of 16 branches
covering all major cities by the end of 2005
Believes the network of branch offices is a precondition to having existing legal
entities comprehensively serviced in their various locations all over the country
Does not have an interest in expanding into the rural markets at this time
Conclusions
In this series of meetings, we spoke with the three major banks that have over 50% of the
deposits within the banking system, and with three other banks that appear well-placed to
expand into, or to focus specifically on rural areas. Our conclusions from our discussions are
that banks are interested in expanding their deposit base and services, but have varying
degrees of motivation to serve small or micro clients. Market research companies define
rural as towns with 2,000 or less inhabitants. According to recent polls 43% of the
population of BiH live in rural areas.
Raiffeisen, the leading bank, is well-established in urban areas and does not seem likely to
push into the rural sphere at this point. Tapping the market for deposits does interest them,
but they are not attracted to very small deposits, or in making small loans.

Zagrebacka is in the process of reorganizing and will actively go after new clients, but this
drive appears to be focused on SME lending, not on deposit-seeking, and they are put off by
the problems involved in obtaining proper security for loans to micro-clients. They are not
likely to efficiently serve either deposit or credit needs of the micro-business market.
Hypo Bank is the organization that seems most committed to serving a broad market, and
extending lending and deposit services into rural communities. They concentrate on
consumer clients, have a concrete conception of the savings habits in the country, and will be
investing in ATM machines, credit cards, and Internet banking. It is questionable to what
degree these mechanisms will serve less sophisticated clients, however.
MEB is a small bank that started by only making micro loans. Even though it is expanding, it
is not strong in deposit-taking, and unlikely to serve a broad sector of the population. Also, it
is beginning to concentrate more on SME lending than earlier, and seeks to grow this area
of their portfolio in the future.
Volksbank has a committed strategy of opening new offices for the next two to three years.
These offices will be in the major cities and focused on serving the best clients from each
area. They do not have an interest in or strategy to serve economically disadvantaged and
underserved markets.
UPI has offices in some locations that can serve rural markets. It also has a history and
understanding of serving small businesses involved in agriculture. However, because of the
banks relative small size and capital it will not be able to expand sufficiently to meet the
needs of a countrywide base of rural and low-income markets.
Consequently, our discussions do not show that the banks currently operating in BiH will
serve or focus on serving the needs of micro- depositors and/or borrowers in a significant
manner. Nor are they likely to have a large impact in rural areas. There is ample space for
MCOs to develop to provide diversified savings products aimed at the small depositor, to
offer a wider array of loan opportunities, and to extend small-scale leasing and insurance
services. In doing so, they will be providing financial services to a segment of the market that
requires intensive customer-service and specialized products, and which is therefore labor-
intensive and fairly expensive to serve. Rather than competing with banks, here, MCOs will
be complementing their services.

DISCUSSION AND RECOMMENDATIONS
A key concern for this assessment has been to determine the MCOs goals and aspirations for
the future. Our interviews with the senior management teams determined that they share
several significant perspectives. First, they are committed to continuing their operations for
the long term. They may not know how they will accomplish long-term sustainability, but
they are constantly seeking alternatives for survival. Secondly, they are dedicated to serving
the needs of the economically disadvantaged, underserved, and rural populations. They
remain committed to their original missions and are determined not to vary from them,
whatever structure they may choose. Finally, they aspire to have greater flexibility to offer
more and better services and products to meet the needs of their markets. They are frustrated
by the constraining limitations imposed by the current Law on Micro Credit Organizations.
On the basis of the data that we have gathered for this assessment we believe that there are
strong reasons to support the Bosnian micro-credit organizations in strengthening and
diversifying their activities, and that this should include savings mobilization. At this point in
time most of the MCOs are very donor-dependent and also limited by law regarding the
products that they can design to serve their clients, yet they are working in communities in
which significant economic growth can be expected in rural communities, and with small
entrepreneurs. Therefore, we recommend that they be assisted in transforming themselves
into full-service, self-sustainable financial intermediaries for the micro- and small-business
sectors, and also be allowed to serve a wider category of clients than at present. Done well,
savings mobilization can significantly increase the MCOs outreach and provide them with
funds for future lending and the development of a selection of products of interest to their
clients.
The MCOs are increasingly serving rural communities and therewith, one of the economic
sectors that is likely to expand rapidly in BiH, considering the sizable donor investments that
are being made in the agricultural sector. USAID, IFAD and the World Bank are all currently
sponsoring new agricultural initiatives, and significant amounts of funding are being invested
in these projects; some of which will flow into credits via selected commercial banks and
MCOs. These loans should generate income, a part of which will make its way into savings.
Also, the loans and increased investment activity will create a need for other services which
some MCOs are researching and could well provide: micro-insurance, micro-leasing.
Because farms are small in BiH, it is likely that the expansion of agricultural production will
be undertaken, in large part, by micro-enterprises the needs of which are seldom served by
the formal banking system. In other economic clusters that USAID is supporting, such as
tourism and woodworking, micro-finance can play a role as well. Small tourism enterprises
already make use of micro-credits, and woodworking companies sometimes resort to micro-
credits for working capital. With larger lending limits and longer terms, microfinance can
alleviate part of the current lending gap between micro-loans and formal bank loans.
Thus a dynamic microfinance sector would well serve the countrys development goals. The
Bosnian MCOs are well managed, transparent, successful and sophisticated organizations.
Their managements are very competent and are up-to-date on emerging trends and
developments within the microfinance industry. They are capable of doing much more than
the framework within which they currently operate allows them to do; and in this research we
have seen how creatively some of them innovate new products for their clients. However, it is
important to note that they grew out of NGOs with different missions and goals, and that

these shape their organizations, as does BiH microfinance law, and their particular markets.
They will need to evaluate their futures from their own perspectives, and decide which course
to take, just as they will need to evaluate the market for the savings products they might offer.
However, the donor community can also play a vital role in supporting these decision-making
processes.
The demand for savings products has figured largely in this assessment. We have seen how a
large majority of the population does not save in any regular, formal way. Cash savings are
generally kept at home, or invested in home improvement, real estate, or circulated in an
income generating endeavor or a formal business. We think that it is important to note, too,
how substantial sums of money change hands monthly in the small loans that pass between
family and friends. In the absence of useful formal services, people are acting as each others
bankers; and this is an area into which MCOs could successfully move, providing services
that parallel and complement domestic lending arrangements in exchange for deposits.
MCO managers are convinced that savings exist to be recruited, and the results of this
assessment confirm this view. It also confirms the belief that sums to be recruited will be
small, at least initially, and that deposits will grow gradually. MCOs will have to work hard
to design attractive, easy-to-use savings products that can complement those offered by
banks, and - even more importantly challenge and speak to the security felt by people who
keep their money at home. The primary competition MCOs face in mobilizing savings is the
pillow, the mattress and the sock, rather than banks. One MCO manager stated the belief that
MCOs that successfully mobilize savings can contribute towards restoring trust in the
banking sector, and this would certainly be beneficial. If people find attractive savings
products in MCOs and begin to use them, they may be more likely to turn towards the banks
eventually when their economic situations warrant it.
While conducting this assessment we occasionally heard the comment that if MCOs began to
receive deposits that they would be taking deposits away from the banks. However, the
amounts of savings that the MCOs would need to mobilize to complement other sources of
funding are marginal in the larger scheme of things. The size of the micro credit industry
(KM 150 million in assets) in BiH is less than 3% of the size of the banking industry (over
KM 5 billion), which also demonstrates why banks do not want to expend the time and
resources to aggressively go after micro and small depositors. As we have seen, the BiH
banks do not have much interest in serving the micro-savings or micro-loan markets, and
there appears to be plenty of market space for both industries to co-exist. Rather than
competing with banks, MCOs will be complementing their services.
The legal changes that are required to make savings mobilization possible for the MCOs are
in part already underway with the work initiated by the World Bank LIP II Project, and by
IFAD. The World Banks efforts to amend the current Law on Microcredit Organizations will
enable any MCO that decides to invest in, or transform into another financial structure to do
so. However, the World Bank is focused more on the finance company option. The new Law
on Savings and Credit Associations being worked on by IFAD will create an opportunity for
an MCO to seriously consider transforming into a deposit-taking institution. IFAD will
encourage the creation of small S&Cs in rural areas, but it appears that it will be quite some
time before any are actually up and running. Bosnias MCOs will have a great advantage,
because they are established in many rural communities and have offices and representatives
working there today.

Although the World Bank and IFAD are both working on issues that could change the futures
of MCOs, neither is making any effort to help the MCOs analyze the possibility of taking
deposits, or how to transform into a deposit-taking institution. Nor do they plan any kind of
support for the organizations that undertake such an endeavor. There are many issues to
consider when a non-profit, donor supported micro credit organization transforms from its
current status to an alternative structure. These include:
Determining the financial viability of the option

Securing a legal framework that permits micro-financers to operate in a way that
enables them to serve the market that is not served by banks
Regulating and monitoring
Developing deposit insurance
Deciding how to invest existing donor funds now considered capital
Raising additional capital
Leaving the world of no taxes to becoming a profit oriented, tax paying organization
Providing a return to members or shareholders
Meeting fiduciary responsibilities created by taking deposits
Conducting sophisticated market research
Designing and developing new products, including test trials
Hiring and training of personnel
Funding additional locations and equipment
Setting up internal audit procedures
Conforming to EU standards
Research and experience in other countries suggest that complexity of these issues will
require international technical expertise and assistance. Therefore, we think it would be very
useful if the donor community would provide such support.
It is very likely that the MCOs in BiH will take different paths into the future. Mobilizing
savings is a resource-demanding prospect, and only a few are probably strong enough to
undertake it at this point. Some will find other alternatives more in line with their possibilities
and missions. This may include future mergers, and for smaller (or larger) MCOs to join
efforts in seeking to take deposits. Even the least self-sustainable MCOs are doing important
work, and doing it well within the structure they now have. The economic growth in the
sectors served by MCOs has been significant as proven by the greater than expected job
growth and jobs sustained, therefore, finding ways for this industry to continue for years to
come is important to BiH.
The mobilization of savings in the rural and economically disadvantaged sectors of the
economy will go far beyond providing MCOs with inexpensive funds for lending. It will
require them to regard their organizations as financial intermediaries, rather than as lenders,
and will make them more responsive and flexible in providing products to meet community
needs. The results will be the establishment of a sustainable, innovative, vital micro-finance
sector that will provide new services that banks are not set up to provide, particularly to the
low-income sectors, and in rural areas.

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Robinson, M. 1994.Savings Mobilization and Microenterprise Finance: The Indonesian
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GLOSSARY OF ABBREVIATIONS
AMAP Accelerated Microenterprise Development Project, an association of organizations

that provide support for microfinance
BiH a common abbreviation for Bosnia and Herzegovina
CGAP - Consultative Group to Aid the Poor, a member of the World Bank Group
EBRD European Bank for Reconstruction and Development
FSBAT Financial Sector Business Advocacy and Training, a USAID project in Bosnia and
Herzegovina
IFAD - International Fund for Agricultural Development, a part of the United Nations
KfW - Kreditanstalt fur Wiederaufbau
KM the convertible mark, Bosnias currency.
LID Local Initiative Department, the agency supervising Bosnian MCOs
LIP Local Initiative Project, the World Banks funding vehicle for MCOs
LSMS - Living Standards Measurement Survey, Bosnia and Herzegovina
MCO micro credit organization. For the purpose of this report, those organizations that
make loans for income generation or micro-businesses.
MFI micro finance institution. For the purpose of this report, those organizations working
in the micro-finance sector that have the ability to give loans but also to accept
savings and provide other financial services.
NGO non-governmental organization
RS the Republica Srpska, one of the political entities that make up Bosnia and Herzegovina
S&Cs - savings and credit associations
SME small or medium-sized enterprise
WB The World Bank Group

Annex A Notes on Methodology
Because one of the main objective of the study was to determine if there is an untapped pool
of savings that MCOs could attract, we have spoken to a number of MCOs about their
interest in deposit-taking, and their views of the savings market. We wanted to hear about
each organizations current strategy for sustainability, their view of deposit-taking, how
seriously they are considering it, and what, if anything, they have done to prepare for such a
future undertaking.
We also conducted a series of focus groups with the loan officers at larger MCOs (EKI,
Mikrofin and Partner), reasoning that these are the people who, through their constant contact
with small entrepreneurs, are in touch with the concerns of the small business community.
They accept and evaluate applications from prospective clients on a daily basis - some of
whom are accepted as clients, and some of whom are rejected. The success of MCOs is built
in part on the loan officers knowledge and interaction with their clients. Therefore, they must
have a good understanding of the savings needs and capabilities of these communities.
Another approach has been to discuss the issue of saving directly with current MCO clients.
A total of twenty-five interviews were conducted with entrepreneurs from EKI, Partner,
Mikrofin, Prizma, and Sinergija. The interviews were held at clients places of business, the
majority in rural areas. These interviews revealed the particular perspective of entrepreneurs,
one which was also echoed in some individual interviews held with the public-at-large.
As it is most likely that MCOs will recruit deposits from the public in general - and not only
their loan clients if they begin to mobilize savings, we believed it important to obtain a
wider view of Bosnians perspectives on savings. In the beginning of June we negotiated a
nation-wide survey on savings and on bank and MCO recognition with Mareco Index Bosnia
(MIB), a local market research company, as part of their monthly Omnibus survey. A total
of 18 questions were asked of a representative portion of the BiH population, in this case
2,900 families, in mid-June. The results were further broken down by areas of the country,
rural/urban populations, heads of households, and male and female respondents.
In mid-July, Puls market research agency conducted a series of six focus groups in the cities
of Mostar, Tuzla and Banja Luka. The participants in the groups were economically active
people, only a few of which had previous contact with MCOs. Three of the groups brought
together urban people, and the other three, rural people. During the same period, individual
interviews were also being conducted by Puls in these cities and in outlying rural
communities, covering basically the same kinds of questions that were being discussed in the
focus groups. These interviews confirm the findings in the focus groups, and back up those of
the survey. Patterns definitely emerge in our research, repetitions of savings experiences,
strategies and beliefs, which lead us to our conclusions.
It should be mentioned that the time span (four months) allowed for the study, its timing
during the summer months when people and organizations take time off, and budgetary
considerations all had their impact on the methods used. An omnibus survey was used rather
than a qualitative full-scale survey due to financial considerations; and this quantitative
survey was done prior to the qualitative work because the June omnibus was the last
opportunity before the end of the summer. Thus we were not able to make use of the insights
gained in interviews in formulating the quantitative work, which would otherwise have been

desirable. However, the information gained in the focus groups and in-depth interviews does
corroborate findings in the survey, and helped us to interpret the multifaceted nature of
savings in BiH.

Annex B How do the people you know save? The responses of 36 interviewees.
- Mostly like me, they keep their money at home. If someone does not need his savings for
living, then it stands still. If they are in position to invest in some business, in most cases they
ask for help from a bank. They save money if they want to buy a piece of land or if they want
to build certain object; mostly it is for God dont let it be.
- Mostly they keep their money at home or turn it into goods, gold etc. All those that do have
money to save, they do not save in banks, they keep it home under pillows.
- There are no seriously thrifty persons here. They are all retired men and refugees who do
not have means to save. But they need to put something aside. They leave something, but it is
a small change. They fix the house, go to the coast, I do not know. The ones who save today,
save to build a house, buy an apartment, for illness and something like that.
- They do not talk much about savings. This is only surviving. Very few have savings. It is for
God dont let it be.
- There are only few with start-up capital to enter a private business. The situation does not
allow them to save. We hope for better. They try as much as they can to put something aside.
It is all for certain security. Some are like me, save through business, some save in banks.
- Mostly without trust, they keep their money in the banks. Some invest in some business.
What is left behind their monthly income, they put aside.
- People I know save and invest very poorly. There is nothing to save from. Mostly, it is for
God dont let it be.
- In the banks. Larger sums they keep in banks, and in home they keep for God, dont let it
be which is a negligible amount. They do not talk much about it. It is a personal thing.
Significant number of people do not talk about the way they save their money.
- They do not talk about that. There is nothing to save from. No conditions. Mostly for God
dont let it be. At home, or they spend it immediately. Or turn it over through business.
- I think they mainly rely on their own saving hide it in pillows. They put it aside, although
it is not large saving. They spend it on holidays. They buy something, car investing it.
- Savings is a difficult topic for discussion. The real situation is that there are really not
many of those that can really save today. My parents are saving from their pensions for
God dont let it be. There is not much savings because of weak incomes. People save small
money. They save small change of 100-200 KM at home. They go on a vacation. They buy
something for the house; they service their car and register it that is the classical way of
saving for an average man with average earnings.
- Today people rarely save. There are very few who save, those who deposited money in the
banks and now live from interests. Who plans to invest, invests right away, he doesnt lose
time, and if someone wants to keep it for old age, leaves it in the bank. There are few of those

who keep it in the bank: There are not many of those that work. And for those that have too
much, I dont think that they keep it all in bank. They keep it at home behind heavy armored
doors and alarm devices.
- In home. Salaries through banks money goes to current account in the bank, and that is a
form of savings as well. People save differently banks and hidden places. They save in
order to start something in the future, certain business.
- I dont believe in bank savings. People take more loans than save. They dont have enough
money to save. Usually they invest in real estate.
- People usually save for God dont let it be and for different investments. They invest in
business or invest in their household.
- People talk about savings like they are talking about creating some kind of safety. People
that I know save for God dont let it be, and for other things, depending on their ability to
save. People save in more ways, but mostly by creating material goods. They are trying to
invest in safe businesses.
- Usually one saves for a trip or for a better future. Probably at home in safes.
- People in my surroundings almost dont talk about savings and money. They save in a bank
and at home. Buy real estate.
- For doctors, for dark days. Even those who save, I dont believe that they save in banks.
People keep money in their homes mostly, if they succeed at all in putting anything aside.
Keep it for dark days, for some emergency situations.
- These elderly usually keep money at their homes. They save for God dont let it be, some
for investment in agriculture.
- Saving at home. Invest in agriculture business. People are mostly skeptical when it comes
to bank savings, having in mind what has happened. They lost trust. Though banks are safer
than home when it comes to unplanned money spending.
- People dont save in banks because they dont give good interest rates they dont
stimulate. As I said they dont have anything to save from. And it is not possible to develop
business through savings, as is possible abroad. Investing in business, buying house
appliances and other household objects, cars...
- In the bank. 70% they keep, 30% invest in business.
- They see that they need to save. They trust more foreigners for savings. People here save
the most at home, but still they are not educated enough, they lack information. Those who
save mostly save for an agricultural business. People dont have real information. They were
crossed many times so far (lies before elections). That is bad of course, but I think that
situation will change in a few years. They keep 100 to 200 KM at home. And then they spend
it on wardrobe, car, going out, and at the same time they eat only potatoes at home. There is
no consciousness of business.

- I dont know anybody, but really nobody, who saves. There is no money here so one can
save.
- There are few who save in banks today. People dont save.
- Middle class mostly doesnt save. They mostly economize through life. Because, their
income is not enough to put anything aside. That is bad, but considering the situation today,
it is difficult that it will change. They keep it at home mostly.
- People save in order to collect enough money for private business, building a house or
something similar to this. They save mostly at home. For dark days.
- Today there are very few citizens who really save. Only people that have small business
have certain funds. Regarding common citizens there are very few those who save. Those
who live from salary invest very little in savings, because they are tied with bank loans and
they are repaying them. They have no possibility to save. Some buy real estate, some save in
cash, some at the bank, some borrow with interest. They all save in case they need to buy
something, to invest in something, and then to place that money somewhere.
- No way.
- Having in mind that many people in my surroundings dont have that kind of income, it all
comes down to surviving, and because it is so, its stupid to discuss savings. Real estate
investment. No possibilities. No income. It would be good to change but they need earnings. I
dont know if they save at all.
- I dont know what to say. Most people dont have anything to save. They save for God
dont let it be, for investment. Some save in banks, but more of them keep money at home.
- There is small number of people who have money to save. Who has money invests it, and in
order to keep it in the bank one has to have plenty of it. There are not many savers.
- People dont have any trust in savings at all. Some leave money aside to have it when they
really need it, but they rarely save in banks. People keep money to themselves, at home,
because they fear that they will not be able to get their money back from banks. People trust
only themselves. I dont know hardly anyone who can save. It all gets spent mostly. Only
people abroad can save. They invest in real estate, houses, flats, or cars.
- They look positively at savings but have no way or funds to save. They mostly save in goods
and money. People who save cash do that mostly so they can take vacation, buy car, for
buying furniture etc.
- That is not a conversation subject for today, because people dont have funds to set aside
and save. I believe that those are general saving forms, mostly for God dont let it be,
there are too few those that can invest in certain business.

Annex C Basic Information about MCOs and summaries of interviews with their general managers
EKI
In 1997, World Vision International formed a Micro Credit program, Bosnian Enterprise
Fund (BEF), which in April 1999 became a separate institution from World Vision, called
Economic Kredit Institution - EKI. Beginning 2001, EKI was registered under the BH Law
on Micro Credit Organizations.
EKI employs 65 people, and operates from 8 field offices throughout BiH (Sarajevo, Zenica,
Doboj, Tuzla, Mostar, Bijeljina, Bugojno and Brcko). Field offices cover major cities and
cantons (in the Federation)/regions (in the RS) with their operations. In the near future, EKI
plans to expand their operations to Canton 10.
Beside World Vision International funds, from 1996 to 2000, EKI was supported by a
number of international organizations in Bosnia and Herzegovina such as the Swedish
International Development Agency (SIDA), the High Commissioner to Refugees (UNHCR),
the United States Department of Agriculture (USDA) and the Finnish International
Development Agency (FINNIDA). It is also a participant in the group of nine MCOs that
have benefited from a loan from the World Bank (WB), through the Local Initiatives
Departments (LID). The LIDs are supervising bodies on the entity levels that support and
monitor MCOs in the RS and the Federation.
According to director Sadina Bina, EKI is interested in accepting deposits. Ms. Bina pointed
out that they have not done any serious research on the question because of the legal hurdles
that are currently in the way. The microfinance law took a long time to be established, and, as
she noted, only became a reality because of the concerted efforts of the World Bank and the
LIP Project. Thus, EKI has not considered it worthwhile to invest time and energy in
investigating deposit-taking, as it is, today, only a remote possibility. More generally she
feels that there is a lack of information about what is involved in deposit-taking; there is
interest and excitement about it, but little concrete knowledge.
Should the legal changes be made that would allow it, however, EKI would be very
interested. Ms. Bina sees it as an excellent way of raising funds, as a service of interest to
EKIs clients, and as a good way of rebuilding trust in the financial sector trust that the
banks will also benefit from in the long term. She feels sure that there are savings to be
captured in the communities they serve, and pointed out that, for example, that clients repay
loans even when they experience economic crises, indicating that they have resources. Also,
she pointed out that some clients see MCO loans as a kind of obligatory savings they may
possess the amount of money they apply for, but prefer to take a loan and not touch their
savings. While this costs them more, they retain the investment that they made when the loan
is repaid.
However, Ms. Bina realizes that a decision to move into deposit-taking will involve a great
deal of preparation. Ideally, they would like to be able to accept deposits from the general
public, but she expressed some reservations, believing that a rapid inflow of too much funds
might destabilize the organization. She would like to set deposit-taking up slowly, step by
step; training staff, running pilot projects. Ideally, accepting savings could be a way for EKI
to grow with their clients. In addition to accepting deposits, they would like to be able to

provide money transfers and to develop insurance products. She, as other MCO managers,
pointed out that the current MCO structure is a transformation stage and that they need to
be able to grow and develop new products and services. Future changes should include a
system of oversight, and deposit guarantees; should one MCO run into trouble it would have
serious repercussions for the entire branch, and their important work in rebuilding the country
and peoples trust would be seriously diminished.
EKI has also considered the World Bank option of becoming a finance company, and has
some reservations. One fear is that of mission drift, they do want to focus on low-income
clients, on the underserved. If they were to transform into a structure where they are profit-
driven, they might be influenced to modify their target group and their products. Such a
tendency might be controlled, however, by keeping a majority of the shares in the hands of
World Vision, their founding NGO. Ms. Bina emphasized that they do not now operate in a
way that seeks maximum profitability, but want to serve their current clients well, and focus
on fulfilling their mission statement, and on providing high quality service. Nonetheless, they
do see their market for loans shifting; loans in urban areas are increasing in size, and they are
now lending more in rural areas (EKI is the MCO with the largest percentage of their
portfolio in agricultural loans, near 50%).
Partner
Micro Credit Organization Partner was initially formed and founded in 1997 by the
Economic Development Department of the Mercy Corps/Scottish European Aid (MC/SEA).
During 2000, MC/SEA transferred the management and legal responsibilities to Partner,
which was registered as a Micro Credit Organization in January 2001.
Partner is currently one of the largest of the MCOs in the country, and is headquartered in
Tuzla. They have recently acquired new business premises for the head office, employ a total
of 85 people, and geographically cover 74 municipalities in the Northeast and Central Bosnia
and Herzegovina. Partner has 6 regional offices and 21 satellite offices throughout the
Federation of Bosnia and Herzegovina and Republika Srpska (RS). In the near future, the
organization plans to expand their geographical coverage to Gorazde, Jajce, and Hadzici
municipalities, as well as some other Federation and RS municipalities. According to
Partners three-year business plan, by 2004 the company plans to open a branch office in
Western BH as well. In each regional office credit operations are decentralized.
Beside the MC/SEA funds, from 1997 to 2001, Partner was supported by other international
organizations in Bosnia and Herzegovina such as the High Commissioner to Refugees
(UNHCR), the United States Department of Agriculture (USDA), the United States Bureau of
Population, Refugees, and Migration (BPRM), UMCOR , USAID, Charles Mott Foundation,
and Fred Foundation. It is also a participant in the group of nine MCOs that have benefited
from a loan from the initial funds approved by the World Bank. The organization is also
currently using commercial credit lines from Raiffeisen Bank.
Partner has not made any decision as to what their strategies for future sustainability will be;
there are no specific plans to date. They are considering various alternatives, and will be
conducting their own research in the upcoming months.25 Mr. Senad Sinanovic, Partners
25
Partner has participated in research done by the Microfinance Centre for Central and Eastern Europe and the
New Independent States (see Tsilikounas 2003). The study deals with the role that microfinance played in the

executive director, indicates that the organization is embarking on a process of examining
clients needs for new services and products, and they will cover not only the eventual need
for deposit services, but also for micro-insurance, particularly credit life insurance. Insurance
can be offered by MCOs by becoming agents for an insurance company, but he feels that
there is some risk involved in linking ones organizations reputation to another company.
Partner will be conducting focus groups, and the assessment will be done gradually and is
expected to take some time. As regards deposit taking, if it is determined that there is a need
for the service in the community (among clients and non-clients), they would need to
determine what kinds of products they could offer, and then go on to build trust in their
organization to accept deposits; something which he believes could be done effectively by the
loan officers working in the field. Mr. Sinanovic stated that ideally, they would then like to
offer voluntary savings products to the public-at-large, not only to their clients. He
emphasized, however, that they have no experience in the area of deposit-taking.
They have considered the possibility of becoming a finance company, but are concerned
about becoming a for-profit organization because of the complicated tax issues that go with
such a transformation. There is also the possibility of mission drift; there are cases where
micro-credit organizations have lost sight of their original target population as the
organization becomes increasingly like a bank. There are, however, also some good
examples.
Mr. Sinanovic does believe that there are savings to be recruited, because low-income people
do save because they must have something in case of an emergency, and everyone has some
kind of reserve. In villages, for example, reserves may be kept as cattle and sold when need
arises. He also pointed out that the great inflow of cash into the banks at the time of Euro-
conversion proves that there are a lot of in-cash savings among the public. Partner would be
able to recruit deposits, Mr. Sinanovic feels, because of their reputation for fairness. Their
main strength in lending, which would also serve them in attracting deposits, is the trust they
have built in the communities where they work, their accessibility, good communication with
their clients, and the convenience of transactions. He believes they are well-positioned to
receive deposits.
Mikrofin
In 1997, CARE International formed and managed a micro-credit program aimed at

disadvantaged social groups with a purpose of providing credit to the economically active
low-income population. During 1999, CARE International transferred the management and
legal responsibilities to Mikrofin, which was registered as a Micro Credit Organization in
2001.
Mikrofin is the largest of the MCOs in the RS, and is headquartered in Banja Luka. It has 72
employees, and geographically covers Banja Luka, Bihac, Prijedor, Gradiska, Derventa,
Brcko, and Bijeljina municipalities and surrounding regions. Mikrofin has 7 branch offices
and 11 satellite offices, and, in the near future, plans to expand their geographical coverage to
Zvornik and Celinac. Each branch office is organized as a separate profit center.
Beside CARE International funds, from 1997 to 2001, Mikrofin was supported by other
international organizations in Bosnia and Herzegovina such as the High Commissioner to
BiH reconstruction process, and makes some suggestions for Partners future.

Refugees (UNHCR), the United States Department of Agriculture (USDA) and the
Government of Ireland. It is also a participant in the group of nine MCOs that have benefited
from a loan from the World.
Mr. Aleksandar Kremenovic, the director of Mikrofin, indicated that the organization has
been thinking about the issue of sustainability since their inception as an MCO. He believes
that a gap exists between MCOs and banks, the only two financial institutions that exist
today. Mikrofin has decided to transform itself from a social institution into a financial one.
Their present structure can only be temporary, since it limits their lending activities, and also
limits their future development as they cannot offer other services. At present they are unsure
of their future structure, but they are actively seeking a new structural form.
The management is considering transforming the organization into a micro-bank or a new

type of institution that can accept deposits. The initial price of such a transformation will be a
smaller number of active clients. While the current pool of active clients makes Mikrofin
sustainable, Mr. Kremenovic points out that they must be able to offer additional services to
new and existing clients. He does not expect to receive very large deposits at first, they will
be small amounts; but there may be many such small deposits. While they have not carried
out significant research on the target population, he believes that there are substantial
amounts of money that are not in the banks, something demonstrated by the events
surrounding the Euro conversion. It will not be easy to attract these savings, but by building
trust, offering different products, and relating savings to lending, he believes Mikrofin will
slowly be able to grow a base of deposits.
The organization is already making preliminary preparations for accepting deposits. They
have recently prepared a new IT system that will be able to handle deposit-taking without
problems, and they are expanding their infrastructure by acquiring business premises in the
communities where they are active. He pointed out that bank transactions take too long today;
clients should be served in five minutes, and not thirty minutes. Mikrofin wants to be able to
provide more and better services than the banks, which are slow and conservative in
comparison; while some of them are improving in recruiting savings, they are not good at
lending. Also, Mikrofin wants to retain their emphasis on micro-enterprises and SMEs,
especially in the agricultural and agro-industrial sector.
For the changes they envision to become possible, laws and regulations need to be changed.
Also, Mr. Kremenovic indicated that governmental supervision of MCOs that accept public
monies must be put in place. He feels that control should take place at the entry level.
Existing laws may be changed, new regulatory bodies set up. Because the government does
little without being prodded by the Office of the High Representative (OHR) or USAID, help
from these organizations in facilitating the process would be very welcome. He believes that
the change process should be taking place within the next two years. He does not support
IFADs initiative on savings and credit associations, believing that the suggestion is too late,
since the market is already segmented and defined in BiH, and such associations have little
prospect of long-term sustainability.
LOK
LOK Micro (LOK), formerly a part of LOK Group, has been operating independently since
January, 2003. LOK Group is a financial and consulting organization, which includes the

investment fund Bosinvest, LOK Invest, and the LOK Institute. LOK Micro is a self
supporting, independent, non-governmental, non-political organization registered in April
1997 as a Citizen Organization, and founded by Bosnian people. The legal structure was
changed to a Micro Credit Organization in April 2001, in order to comply with the Federal
Law on Micro-financing Organizations, passed by the Federation legislature during 2000.
LOK has been active for six years, now employs 55 people, and operates from 14 locations
throughout BiH (Sarajevo, Zenica, Konjic, Mostar, Modrica, Bihac, Cazin, Sanski Most,
Gradacac, Gracanica, Brcko, Travnik, Bugojno, Tuzla). They plan to open additional offices
in Drvar, Livno, Gorazde and Srebrenica. The organization is part of a group of eight MCOs
that have benefited from a grant from World Bank.
General Manager Nusret Causevic indicates that LOK is currently considering different
options for sustainability, but has yet to come to a firm decision as to their future. Accepting
deposits interests them, but they feel it would be a danger at this point, since none of the
MCOs in the country are ready to do it. Not only do new laws need to be in place, but
supervision and deposit insurance are also essential.
The question of trust is basic in the decision to take deposits. People do not trust the banks,
and it would be catastrophic if an MCO attempted to take deposits and failed. Mr. Causevic
suggested that one way for MCOs that are interested in accepting deposits to do it, would be
for them to associate, either individually or as a group, with a bank or a microfinance bank
through which they could take deposits. In this way they might be able to circumvent some of
the need for legal modifications, and it would also be a way for them to gain knowledge in
this area gradually, without subjecting their organizations to major changes. He also feels that
savings should be collected within a membership organization, not from the general public.
Pointing out the close relationships that MCOs have built with their clients, Mr. Causevic
indicated that they can serve as educators when it comes to the issue of savings. Today,
people reject saving in an institutionalized way. Banks are not trusted. He feels that it is
necessary to educate the public about the need to save, and the trust built by MCOs can
enable them both to carry on a dialog about savings and to actually attract savings. LOK has
recently launched a new product with a savings element in the form of insurance, in
cooperation with Triglav.26 In six weeks they have placed it with 150 clients, which he
believes indicates that there is a demand for savings products. He is certain that there are
potential deposits being held by the public that can be collected by MCOs, and feels that the
MCOs who want to accept deposits should be supported. There is a need for savings products
among clients; today, people cannot take ten or twenty KM to a bank, yet there are savings
needs this small. LOK still has demand for their 500 KM loans; substantial demand in some
areas. Mr. Causevic also pointed out that clients who borrow 2,500 or 3,000 KM can one day
return, worse off, and ask to borrow only 500. Growth is far from uniform and linear.
While LOK is interested in the possibility of accepting deposits, and is exploring different
ways of doing it, the management is well aware of the large investments needed to transform
into a deposit-taking institution, and of the possible pitfalls. Therefore they are considering
the possibilities of a collective solution or a way to obtain assistance. Mr. Causevic pointed
out that while the World Banks assistance is very welcome, their decision-making process is
complex and slow, while USAID could be more efficient in moving things along.
26
The client saves between 440 and 1000 KM per year, and if he can not pay his loan, the insurance steps in.

Micro Sunrise
Micro Sunrise, a self-supporting and non-governmental organization, has been active for six
years. Initially, it was founded by Deputy dd, a private company from Sarajevo, as a
humanitarian organization, in 1997. Humanitarian organization Micro Sunrise ceased to exist
December 31, 2000, and since has been removed from the register of non-government
organizations. Its legal successor is Micro Sunrise, registered under the BH Law on Micro
Credit Organizations December 31, 2000.
Currently the organization employs 65 people, and operates from 22 locations throughout BH
(Sarajevo, Zenica, Herzegovina and Posavina regions in the Federation, and Bosanski Samac,
Bosanski Brod, Derventa and Modrica in the RS). The company operates from their own
premises in Sarajevo, acquired through a mortgage loan from Raiffeisen Bank (KM 754,286),
in 2000. Micro Sunrise is part of a group of nine MCOs that have benefited from a loan from
the World Bank.
Micro Sunrises financial manager, Mr. Milan Seselj, indicated that Micro Sunrise is
currently in the middle of a 5-year strategic plan which includes funding sources and will
take them until the end of 2005. They currently have 6,000 loans for a total of 12,000,000
KM, and are working towards a 2005 goal of loans for a total of 21,000,000 KM. Their
lending in the agricultural sector is increasing, and has grown 13% in the last two years. They
expect it to increase further with their participation in the World Bank agricultural project in
eastern Bosnia. They are not considering changing their structure in any way at this time.
Mr. Seselj believes that accepting deposits is problematic and would require a great deal of
work. The fact that many banks have failed in the region compounds difficulties; as does the
fact that the law does not permit MCOs to accept deposits at this time. They are not thinking
about transforming into a deposit-taking institution now, because it is not possible now; and
expending energy on planning for a transformation is not an efficient use of time and energy
at this point. It is highly questionable whether MCOs will be able to have substantial impact
on the legal situation; however, if laws were to be enacted permitting deposit-taking by
MCOs, Micro Sunrise would absolutely be interested.
He has great respect for the complexity of restructuring Micro Sunrise to accept deposits, and
knows that it will require a substantial investment. They have an adequate IT system and
good infrastructure in place to be able to participate in such a project. He believes that there
are uncollected savings in the public sphere, particularly in the rural areas. Today people are
investing in their homes; putting money in bricks, because they feel more secure with this
kind of investment than in putting money in the bank. The disastrous loss of savings when
banks failed has affected trust in financial institutions deeply.
MCOs have a good future, Mr. Seselj believes. The number of banks is steadily decreasing,
and this will continue. While banks are present in some smaller communities, they do not
make loans there. They are reluctant to lend to small businesses, and their fees for services
are too high. Small loans are not profitable for them. Therefore, banks and MCOs will
continue to serve different sectors of the population. Very few of their own clients (about 20,
out of a total of 80,000 loans made) have eventually been able to obtain financing from
banks. This is due to the time factor involved, and to the paperwork required; banks work
slowly and demand paperwork that clients are not able to produce. Many small businesses

operate in cash, and do not keep the kind of documentation necessary, even after years of
successful operation.
When discussing savings, Mr. Seselj noted, it is important to look beyond formal bank
savings. This is a form of savings that people in former Yugoslavia used to set aside funds for
a specific consumption-related purpose, such as a refrigerator, vehicle, or a vacation. One
needs to explore the subject further, because today savings take other forms, in goods, in
building materials, or hidden in the home. The lack of trust is the major obstacle to
mobilizing such savings in formal institutions. In part, what is also lacking is an efficient
state, where the rules of the game are clearly defined. People lack faith in the future.
Mi-Bospo
Mi-Bospo was founded and registered as a Micro Credit Organization (MCO) by a local
humanitarian organization, Bospo, in December of 2000. The Danish Refugee Council
initially founded Bospo (Bosnian Committee for Help) in 1995 as an organization involved in
humanitarian and psychosocial help for women and children affected by war. In 1996, the
organization began to provide micro-financing. The first funds were received from the World
Bank pilot phase program and were used to target economically active women (70%
displaced) who needed small loans to strengthen their businesses and make their households
self-sufficient. Today, Mi-Bospos micro-borrowers are only women-entrepreneurs.
Mi Bospo is a self-supporting and non-governmental organization employing 37 people. It

operates from 7 field offices in Tuzla and Zenica-Doboj Cantons. In 2003, the organization
plans to expand its geographical coverage to Bijeljina. Zvornik will also be covered, although
no office opening is planned there yet.
Beside the originating equity that Mi-Bospo received from the humanitarian organization
Bospo, it also benefited from a World Bank loan, a Raiffeisen Bank commercial loan and a
loan from the Deutsche Bank Micro-Credit Development Fund (used as a bank guarantee).
In addition, the MCO is an active member of the Womens World Banking network, and was
partially funded by this organization (capitalization funds).
According to executive director Ms. Nejira Nalic, Mi-Bospo is going through a period of
investigating different options regarding future sustainability. She has spoken to different
banks, including Raiffeisen about establishing a partnership. She has consulted with some
MCOs, including LOK and EKI, about a possible future merger. No decision has been made
yet, however, and Ms. Nalic is trying to determine what is best for the organization, and
what will best serve their clients.
She pointed out that the form that some MCOs have taken in BiH has not always been one of
choice; some would prefer to have had a different structure. However, the way in which the
law on MCOs was implemented and the limitations that it contained brought about the
existing organizations. A number of MCO leaders are not happy with the law and would like
to further expand it in order to be able to offer other financial services as well, including
savings, and some are very creative in the products they design to serve their clients within
the existing parameters.

Ms. Nalic said that Mi-Bospo is interested in accepting deposits if there is a client need for
this service, and that it could be a way to secure cash flow for the organization. However, she
also pointed out that micro-credit clients are mobile, and know best how to manage their
money. They do save, but in their mattresses and not in the banks, for now. But the banks
are there, some are expanding their locations, and sooner or later it is likely that clients will
recognize and begin to trust and use banks to save. As the socio-economic situation of the
country improves, this is increasingly likely.
Mi-Bospo has done some qualitative research by using focus groups recently, and Ms Nalic
noted that it proved that clients were very sophisticated, and could readily pick out the least
expensive products. She also cited the case of a client that had two bank accounts, one in
Tuzlanska Bank and one in MEB, and believed that the Tuzlanska account was better because
the bank was located more conveniently for him, but that MEB was more secure. He
managed cash in both of these accounts.
Although Ms Nalic was interested in the possibility of accepting savings as a financial service
to the clients, especially when talking about access and outreach, she thought that it is a
problematic process, one that her organization is not prepared to undertake today. They have
not taken it into consideration or prepared for it because of the fact that it is illegal under the
current microfinance laws, and they would have to be a micro-bank in order to do it. She also
pointed to the necessity of regulation and of deposit insurance, so that savings could not be
lost. She does not believe that clients deposits will be protected enough if they would save
with any other organizational/legal structure but banks.
Prizma
Prizma was founded and registered as a project of the humanitarian organization International
Catholic Migration Commission (ICMC), Project Enterprise in 1997. In 2001, ICMC founded
Micro Credit Organization Prizma. The first micro-financing funds were received in 1997
from the United States Department of State-Bureau of Populations, Refugees, and
Migrations/BPRM, and the United Nations High Commissioner for Refugees (UNHCR).
Prizma also benefited from the funds and technical assistance from other international
organizations such as United Methodist Committee on Relief (UMCOR) and CGAP. Since it
was formed, Prizmas micro-borrowers have been only women.
Presently, Prizma is a self-supporting and non-governmental organization, and it employs 41

people. It operates from 4 branch and 21 satellite offices. Branch Offices are located in
Bihac, Zenica, Mostar and Sarajevo. In 2003/04, Prizma plans to expand its geographical
coverage to Banja Luka (RS), and Tuzla (Federation) whereby its operations would be
covering more than 50 municipalities across the country.
Prizma is an active member of the Association of Micro-finance Organizations (AMFI) and

the Micro-finance Center for Newly Independent States Central and Eastern Europe (MFC
NIS-CEE). Both institutions are involved in providing access to international micro-
financing network and various professional training for its members.
Executive director Ms. Maja Gizdic indicated that Prizma is currently undertaking a
strategic planning exercise and that they would like to expand their services to include
deposit-taking, micro-insurance, and micro-leasing. The current legal environment does not

permit leasing and insurance, but the latter can be provided by teaming-up with existing
insurance companies, acting as their agents. Products that would be attractive to Prizmas
clients include agricultural insurance and life insurance.
Accepting deposits is more difficult, however, Ms. Gizdic noted, due to the legislative
changes required. Deposit-taking would also lead the organization into an entirely new arena,
in which they would need to upgrade the organizations knowledge and their marketing
capacities. This would require time, at least one or two years, and investment; in staff
education, office infrastructure, and security, among other things. The question of deposit
insurance would also be important, as would how to work with the received deposits.
Regulation would be essential to assure citizen confidence. She believes that every MCO
would need to make a serious evaluation at such issues before committing resources.
However, if organized donor assistance would be available for setting up new operations, she
believes that many of them would be interested.
Prizma has not yet made an evaluation of the potential demand for deposit-taking, but expect
that an assessment will be conducted by Bankakademie in the fall. They have conducted a
few focus groups with their core clients, and concluded that some are eager to have savings
products; they see the a need for smaller accounts, and a reluctance on the part of their clients
to use the services of the banks in the area. Ms. Gizdic also believes that the increase in bank
savings is another indicator of the increasing confidence in financial institutions. Prizma has
been considering the possibility of taking savings for some time, she said, and they have been
trying to position themselves to do this by building up trust between their clients and
themselves.
Currently, she points out, clients invest surpluses in livestock (cattle, sheep) or building
materials - people are building all the time, throughout their lives. Women are especially
aware of the need for saving, particularly for childrens educational goals. Yet people with
50KM in hand feel that this is too small an amount to approach a bank with, although it is
large enough to be important to them. Also, Prizmas clients do not trust banks, in addition to
the recent history of bankruptcies, many of their clients view banks as intimidating places
that exist for other kinds of people. They save in their mattresses and some are attracted
to Croatias growing life insurance market.
Concerning the issue of possible future mergers between MCOs and banks, Ms Gizdic
believes that it is probable that banks would concentrate on profits, and perhaps curb an
MCOs mission goals of serving particular segments of the population. Transforming into
finance company, the alternative being promoted by the World Bank, may also make MCOs
social goals more vulnerable. Mergers are another alternative; the choice would be between
trying to merge with a similar organization, or a complementary one; she noted that Prizma
gives smaller loans, and to a different part of the population than an MCO like Mikrofin, for
example.
Sinergija Plus
Sinergija was formed in 1997 as a locally developed Citizens Association. Sinergija

transferred the management and legal responsibilities to Sinergija Plus, in compliance with
the RS Micro Credit Organizations Law, registered as a Micro Credit Organization in

January 2002. From 1997 to 2001, other international organizations in Bosnia and
Herzegovina such as the United Methodist Committee of Relief (UMCOR), Solidarite
(France), and the Local Initiatives Department supported Sinergija Plus.
Presently, the organization employs 32 people, and geographically covers 16 municipalities

in the Western Republika Srpska (RS) through 12 offices. These include: Banja Luka,
Gradiska, Srbac, Novi Grad, Prijavor, Kozanska Dubica, Derventa, Samac, Srpski Brod,
Prijedor, Doboj, and Teslic. In the near future, the organization plans to expand their
geographical coverage to the Eastern RS municipalities by opening a branch office there.
Sinergija Plus is interested in being able to accept deposits in the future. Mr. Zeljko Bogdanic
and Mr. Milord Dokic indicated that they had looked into this question some time ago. They
believe that clients trust MCOs more than banks, with which they have had many bad
experiences in former Yugoslavia. The directors pointed out that MCOs today have little
space to develop. They can grow and serve more clients, but they cannot develop as financial
organizations because they are only allowed to do lending. Sinergija Plus now has six lending
products on offer, and they wonder why they should develop more. They feel a frustration at
only being able to offer variations of the same kind of product when their clients have more
diverse needs. Other areas in which they might successfully operate include accepting
deposits, offering leasing services, larger loans, or micro-insurance. Turning to banks for
future funding is somewhat of a problem, because of the need for collateral; because of this
demand they have bought their current business premises, and plan to use it as collateral in
the future.
Mr. Dokic pointed out that they could not accept deposits at present, even if the law were to
be changed, as they must first become economically stable, with sufficient capital. It may
also be quite some time before a law change becomes reality. They believe that regulation is
very important in a future scenario in which MCOs are enabled to accept deposits, because of
the past bad experiences in the region. There should also be a regulatory agency for the
insurance sector, something which is absent at present. There may also be some competition
with banks if deposit-taking becomes reality, as some banks already see MCOs as
competition in the sphere of lending. But, he pointed out, the market that MCOs are serving
is changing, and most are expanding in rural areas now, where banks are less active or
successful.
There should be room for diversity in the future scenario for MCOs, the Sinergija Plus
directors believe. Not all organizations will want, or be able to move in the same direction.
They would like to be able to provide larger loans, up to 60,000 KM, and for longer terms
five to six years. Many of their clients still cannot go to a bank when they have the need for
loans of this size, because they do not have the necessary collateral and their credit histories
are not good enough. There is a definite need for larger loans. Over 30% of Sinergija Plus
portfolio is now in loans of over 10,000 KM. In the agricultural sector, repayment is almost
100%.
On the probability of being able to attract savings, Mr. Dokic pointed to the experiences of
the Euro conversion. He also pointed to certain observations that they have made regarding
their clients; in the beginning of 2003 a severe drought affected the farmers in the Banja Luka
area. Nonetheless, only one or two of their agricultural clients have not been able to repay
their loans, indicating that they have diverse resources. Also, farmers well-off enough to
finance their own crop investments will borrow instead, as a matter of habit. When it comes

to deployment of resources, a trusted institution in which to save would be valuable for their
community. The land market is not fluid, and farmers are more likely to rent land than to buy
it. People tend to invest in vehicles (70.000 vehicles registered in Banja Luka, a city of
200,000), and they also put their money in bricks, building substantially larger homes than
they need. He indicated that people are building and consuming in part because they do not
have a trusted institution in which to hold capital. Foreign remittances may also be a potential
source of deposits for MCOs, although they believe that the majority of these go into
consumption.
Mikro Aldi
A Citizens Association from Gorazde, ALDI, initiated Mikro Aldi in 1996 as a micro-
lending pilot-project under the auspices of UNHCR. During 2000, Citizens Association
ALDI transferred the management and legal responsibilities to Mikro Aldi, which was
registered as a Micro Credit Organization the same year. The objective of this micro credit
program is to provide micro loans for the economically active low-income population.
Presently, Mikro Aldi employs ten people, and geographically covers Gorazde, Pale, Foca
(Ustikolina, the Federation), Cajnice, Rogatica, Visegrad, Rudo, Sokolac, and Foca (RS)
municipalities and the surrounding regions. Mikro Aldi has two branches and seven satellite
offices in the above listed towns, and in the near future plans on expanding their geographical
coverage to other southeast RS and Federation municipality27. According to the
Organizations three-year business plan, geographic expansion would focus on returnee areas
in the both BH entities, and would result in the hire of an additional eleven local staff.
Beside the originating funds from the Citizens Association ALDI, Mikro Aldi received
funding from the U. N. High Commissioner of Refugees (UNHCR), and the OXFAM
(Oxford Family) International Offices/Netherlands Organization for International
Development Co-operation (NOVIB). It was also a participant in the group of nine MCOs
that benefited from a loan from the World Bank.
Mikro Aldi is moving into a period in which they are obliged to examine their future
strategies. Ms. Ferida Softic, the executive director, indicated that they were not able to
receive a credit line that they had applied for from USAID Business Finance, and were not
renewed for participation in LIP II because of their small size. They have been urged to
develop a strategic partnership with a bank by the World Bank representatives, and have been
in initial exploratory talks with UPI bank and Raiffeisen. Ms. Softic is open to other
alternatives, however; and has not made any decision as to the organizations future.
Ideally, Mikro Aldi would like to remain independent for as long as possible, and she
believes that some of the small MCOs will be able to survive. The issue of deposit-taking has
come up and been discussed at recent LIP II meetings, and she thinks that some of the larger
MCOs may be able to do it, but in moving in this direction they will become more like banks,
and their mission is likely to change somewhat. There is a danger that they may move away
from their original goals of serving the disadvantaged. While some MCOs are moving
towards increased lending in the upper ranges, Mikro Aldi does primarily solidarity group
lending in a very economically depressed area. They lend small sums, and many of their
loans are for agricultural purposes. They have substantially more demand for loans than they
27
Han Pijesak, Trnovo, Kalinovik, Gacko, Bileca, and Trebinje

can meet, and are in need of more financing. With the funding currently available to them and
their present interest rate to their clients (16%), they can cover their operating costs, but not
capitalize.
Ms. Softic believes that there may be some potential deposits in the area that Mikro Aldi
serves, but that there are also many very people who are living day to day, hand to mouth.
Still, the repayment rate on loans is excellent, over 99%. Money is kept by people in their
homes, in the event of emergencies requiring immediate funds. There is a general loss of
trust in the banks, and she noted that she, too, as director of a financial organization, was
sometimes in doubt about the banks with which she deals.

Annex D Summaries of interviews with general managers of six selected banks concerning their plans for
expansion
Raiffeisen Bank
In 1992 Market Bank of Sarajevo was founded. From 1996 to 2000, Market Bank had active
participation from World Bank, IFC, KfW, Soros and EBRD, which provided lines of credit
and capital. On July 21, 2000 Market Bank was acquired by Raiffeisen Zentralbank
Osterreich AG-Vienna. Over the next three years the bank expanded rapidly to become the
largest bank in BiH. This expansion also included the purchase of Hrvatska Postanka Bank-
Mostar in May 2001. The two banks were merged into one bank effective January 1, 2003.
Raiffeisen Bank now has 50 banking outlets, but has no significant expansion plans for the
future, although a few more branches will open over the next two years. Rather, they have
just finished a four-year period of rapid expansion, and needs time to digest the costs and
improve efficiency.
Mr. Osmanbegovic, the executive director, believes that the rural parts of the country have a
cash-oriented economy and are not bank-oriented. The level of distrust is high in rural
areas, since many lost money in banks in the early 1990s, and it will take a long time to
reconstruct confidence in banks. Three years ago Raiffeisen was considering making micro-
loans in the rural sector, but decided to focus their energies on urban areas.
They have, on the other hand, entered the micro-finance market by becoming a lender to the
micro-credit institutions, providing them with lines of credit. They negotiate terms based on
the amount of deposits that the MCO commits to leaving in the bank, and they are
particularly interested in long-term deposits to help them expand their long-term lending
capabilities. Restrictions from the Banking Agency on matching loan maturities to deposit
maturities, has hampered the banks ability to lend long-term to the MCOs. Instead, loans are
structured as one-year revolvers that can be extended for additional years.
Theoretically, micro-borrowers who borrow and repay from a MCO repeatedly should
eventually be able to obtain a bank loan, but in practice this is not the case. Even a 30,000
KM loan is considered very small and not necessarily desirable at the Raiffeisen Sarajevo
office, Mr. Osmanbegovic said. Micro borrowers do not always have registered businesses or
adequate collateral for bank loans, and micro-loans need more monitoring, all of which create
problems for the bank, while clients can feel alienated by the culture that they meet in the
bank.
Mr. Osmanbegovic is convinced that people in rural areas have money to be deposited. They
may be small amounts, such as 1,000 KM, and he would be interested in tapping that market.
He noted that micro-credit organizations are very effective at lending, but that they do not
have a parallel to bank savings; he feels that Raiffeisen needs to find a way to attract micro-
depositors. However, at present they do not have a strategy for doing so.
Zagrebacka Bank

Zagrebaka Bank BH Mostar (ZABA BH) was founded in 1992 under the name of Hrvatska
Bank dd Mostar. In July 2000, Zagrebaka Bank dd Zagreb (ZABA) became the banks
largest shareholder with 66.14% of the shares, which by 2002 rose to 100%. As of 2003,
UniCredito Iltaliano S.p.A., Milan, Italy, became the owner of ZABA, making both ZABA
and ZABA BH full members of the UniCredito banking group.
Universal Bank of Sarajevo is also a member of the group and will be merged into ZABA BH
by mid 2004. The combined bank will have 57 branches covering all area of BiH except the
Eastern RS. Therefore, not only will ZABA be the largest bank in Croatia, but it is highly
possible that ZABA BH, after the merger, will be the largest bank in Bosnia/Herzegovina.
Total assets will be in excess of KM 1 billion with capital of KM 80 million. ZABA BH
currently has 420 employees, and Universal has 320, giving the combine bank 740
employees.
In a discussion with Ms. Zrinka Matanovic, we were informed about Zagrebacka Banks
plans for the future. The bank is currently in the process of merging with Universal Bank, and
is being reorganized by the new owners, UniCredito. There are currently 32 Zagrebacka
branches and outlets, and 25 for Universal, for a total of 57, but as some of these offices
overlap, it is expected that a number will be closed.
Because of the change in ownership, the groups strategic plan is changing, and Ms.
Matanovic thinks that they will expand their service substantially in the rural areas. Although
the new plans are just being rolled out by the foreign management, there are plans to offer
services based on client size and the strengths of individual businesses. Small businesses in
more rural areas will be served by mobile offices, and special attention will be directed to
rural areas that show signs of financial strength due to investment and activities in the
agricultural sector. They plan to have a network including two main offices in Mostar and in
Sarajevo, branch offices in cities, outlets in towns, and mobile offices that travel to smaller
towns and villages. Branch and credit officers will be expected to go out into the field and
contact clients and potential clients. They will focus on small and medium sized businesses
(SMEs) and the branch offices will serve the needs of small clients, while medium sized
businesses will be directed to the main offices. A philosophy of hunters and skinners is
being implemented, with some bank officers responsible for going out into the field and
developing business, while other provide customer service in the bank and do the credit
analysis of loan requests. There will be incentives based on billings and income from the
client base.
Ms. Matanovic pointed out that the market in BiH is changing quickly, and the banking
system has changed significantly in the last two years, as foreign competition has entered the
market. In the future, she believes that there will only be six primary banks to service the BiH
market. As margins are shrinking, banks are now actively seeking more clients, particularly
the less risky ones. Lending to larger businesses is becoming less profitable because they
have the power to negotiate better rates, so they are looking with more interest at SMEs.
Zagrebacka is developing new ways to communicate with clients and potential clients, and
packages of products that are suitable for different sized clients and ones with varied needs.
Within each major category of clients or industry, they are identifying sub-groups and their
needs. Micro-businesses present some problems for banks, however, because it is often the
case that they cannot meet banking stipulations on collateral or other regulations, and it can
be difficult for them to find co-signers, as well.

Regarding the possibility of MCOs beginning to take deposits, Ms. Matanovic was quite
negative. She pointed out that the number one criterion for developing a deposit base is trust,
and she feels that the banks have a definite advantage over the MCOs in that respect,
particularly now, that many banks are owned by stronger foreign banks. All financial
institutions have been hurt by the collapse of the banking system, and regaining trust will take
time. She did not feel that allowing MCOs to take deposits would lead to any good; indeed,
feared that it might undermine the trust these organizations now enjoy. It is more important,
she feels, for MCOs to find a way to reduce the risk of lending to micro-businesses, and
noted that in Serbia, for example, the state guarantees loans made to micro-businesses.
Hypo Bank
Hypo Alpe-Adria-Bank of Klagenfurt, Austria bought Auro Bank of Mostar in 2001. In 2002
it bought Kristal Bank of Banja Luka. Both banks now have had their names change to Hypo
Alpe-Adria. Management has advised that they will merge the two banks in 2004. The
Mostar bank has 30 offices and 270 employees and the Banja Luka bank has 25 offices and
280 employees
Hypo Bank (the combination of Mostar and Banja Luka) will have 55 banking outlets, of
which 24 are full-service branches and the remainder smaller outlets. Four are new,
inaugurated recently. Mr. Petar Juric, the general manager of Hypo, says that they have a goal
of putting a branch or outlet in every community with a population of 5,000 or more, while
ATMs will be installed in smaller towns and villages. Their goal is to install 20 to 30 in the
next few years; and they are also planning for internet banking. New software will be
installed to handle the increased volume of transactions, and to electronically connect all the
offices and machines.
Mr. Juric said that the bank presently concentrates on urban areas, and they have a large
portfolio, mainly focused on individual loans. He sees Hypo becoming a consumer-focused
bank. They currently have several products to attract consumers, one of which is a non-
restricted loan secured by a home mortgage, with a maximum of 25,000 KM. Individuals can
easily obtain loans if they are employed and can provide two co-signers. Hypo also
encourages loans secured by cash in the bank; which provides clients with cash for any
purpose, while ensuring that they will have savings when the loan is repaid. Hypo also has
plans to become a major credit card issuer. They have about 15,000 cards out now, but have a
goal of getting up to 40,000, which will give them 15% of the total market and allow them to
comply with the requirements set up by Visa, the card they are issuing.
Savings vary from region to region, Mr. Juric pointed out. He compared the city of Zenica,
with its huge steel mill, with the more rural western part of the country. In Zenica many
people were employed and had steady incomes, and the strategy was to borrow money when
extra cash was needed, since incomes could be depended on. A couple of banks could serve a
large population. With the plant operating at a fraction of peak production, Zenica is very
depressed, and the tendency of people not to save intensifies the problems. In the western part
of the country there were few factories, however, and people had private businesses and
saved. Many also were obliged to go abroad in search of a living, and sent remittances to
family left behind. In such places, as many as five banks might serve a quite small
population; and as people had the habit of saving, they continue to do so. Mr. Juric noted that
the rural market was very developed before the war; and that rural areas sometimes had a

very high standard of living, better than urban areas, due to their activities in private
enterprise, often agricultural businesses. This led banks to open branches in small villages,
and since people saved and ran businesses they know how to manage money in the long term
and in the short term.
When the Yugoslavian banking system collapsed, most people lost all of their savings. Since
the war people are putting their trust in the foreign banks. However, many are still trying to
re-establish themselves, to get back to their previous economic situation; and this effort
absorbs much of the funds that might otherwise be placed in savings. The issue of trust is
paramount; in the RS, Mr. Juric pointed out, there is almost no saving at all. Yet trust is
returning. When opening an account in Hypo people ask:
How old is this bank?

Can I get my money any time?
What benefits am I being offered?
Mr. Juric noted, also, that although loans are growing in the country, with more and more
people obtaining credit, delinquency is not growing proportionally.
MEB Bank
Micro Enterprise Bank (MEB) was founded in November 1997 as a multinational initiative to
provide micro financing in Bosnia and Herzegovina. The founders were EBRD, IFC and the
Dutch Government development lending organization, FMO. The bank has also developed a
close relationship with Commerczbank AG of Germany, which has become a major
shareholder. All of the founding shareholders either contributed capital or long term loans (10
years) or both. This gave MEB not only a strong capital base but all long term liabilities that
enabled long term loans. MEB currently has 180 employees, and operates through 8 branches
and 3 satellite offices countrywide.
Because MEB Bank has had sufficient capital and long term loans from shareholders, it has
not concentrated on developing deposits. They currently have an 80% loan to deposit ratio.
But now that the bank is well established, there will be a greater emphasis on increasing the
deposit base, and this will be the responsibility of the people in each branch office, according
to Mr. Dirk Felske, the general manager. He is of the opinion that there are substantial
deposits to be obtained, inclusively in rural areas. The bank has not conducted any research
on how to attract such deposits.
In the future, MEB plans to focus more on the rural market, says Mr. Felske, since most of
their clients are now in urban areas. They have plans to open some small offices, or outlets, to
serve that market; for example in Prijedor, Trebinja, and some other unspecified locations.
This does not appear to be a stated strategic plan, however, but more a process of general
expansion. MEB is currently in the process of conducting a market survey on the banks
customer service via in-depth interviews. Five consultants form the German home office have
been involved in interviewing clients and conducting in-house training on how to conduct a
market survey. The goal is to determine how the bank is perceived, and how they can better
serve their market.

Mr. Felske expressed some concern over the substantial increase in consumer loans
throughout the banking system. He disapproves of some foreign banks policies of
aggressively encouraging people to borrow, and making it easy for them to obtain loans; he
believes that it is likely that Bosnians are becoming over-extended with debt. MEB is now
taking a more conservative approach to consumer lending, tightening the banks credit
criteria and underwriting standards. MEB now has credit analysts that take the information
developed by the relationship officers and make the final credit decision.
UPI Bank
UPI Bank was founded in 1990 from what used to be an internal bank of the largest food
processing company in Bosnia and Herzegovina. The banks founders were companies from
various industries, but because of UPIs background and initial focus on agricultural
businesses, most of its shareholders came from that industry.
UPI currently has 134 employees, and operates through 6 branches and 6 satellites. Mr.
Letic, General Manager, uses a map to explain UPI Banks current distribution of its 12
offices. The most recent was Bugojno which was opened 4 months ago. The largest
concentration of offices is in the region between Tuzla and Odzak, where they have 6. They
have begun a process of analyzing all offices for their level of profitability and how to make
each a strong profit center. Once they have completed the analysis, they will begin to
determine what new markets to consider in the future. Mr. Letic explained that for the
present time they do not plan to open new offices. However, areas that they may consider in
the future are, Bijeljina, Krajina, and Jablanica.
UPI continues to get is greatest deposit growth in the major markets such as Sarajevo. They
have also experienced good growth in the Brcko area. They do not anticipate much deposit
growth from the rural areas. However, they have had conversations with a small MCO in
Gorazde, Mikro Aldi. The MCO approached UPI to discuss a possible cooperation or
partnership. The discussion has been put on hold during the summer, but the door is still
open for discussion. If they were to strike a deal with the MCO, UPI would provide
assistance such as a line of credit, and would probably open an office there. The MCO would
continue to serve its market as in the past and maintain its mission.
Volksbank
Volksbank BH was founded in May 2000. The parent bank, Volksbank of Austria, decided
to start a new bank instead of acquiring an existing bank, the method used by other foreign
banks that have entered the Bosnian market over the last 4 years. Volksbank now has 6
branches with 125 employees.
After Volksbank open its first office in Sarajevo, it focused on developing its central
operation. In the last year it has embarked on a strategic plan to open branch offices
throughout BiH. They will open 4 offices in 2003 and then 3 branch offices in each year
2004 and 2005. Their goal is to have 16 branches covering all major cities by the end of
2005. Ms. Sekavic explained that they have a planning committee that meets on a regular
basis to consider new locations and priorities.

Their overall goal is to follow the motto of having branch offices all over the country where
Volksbank will offer it services and products to the legal and natural entities in all significant
cities of the country. The network of branch offices is a precondition to having existing legal
entities comprehensively serviced in their various locations all over the country. They do
not have an interest in expanding into the rural markets at this time.

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Microcredit Organizations and

in Bosnia and Herzegovina

An Assessment for USAID

Monica Lindh de Montoya

Purpose of the Assessment

The main findings of our research are that

Level of Interest from MCOs

USAID FSBAT 3 9/17/2008

The Role of Banks

USAID FSBAT 4 9/17/2008

Enabling MCOs to Take Deposits

USAID FSBAT 5 9/17/2008

Savings Mobilization as a Strategy for Sustainability

Research conducted by microfinance practitioners throughout the developing world indicates

USAID FSBAT 6 9/17/2008

There should be an enabling macro-economy with an appropriate legal and regulatory

The Market for Savings

USAID FSBAT 7 9/17/2008

Micro-credit Organizations, Strategic Planning, and the Question of Deposit-Taking

USAID FSBAT 8 9/17/2008

BiH Bank Expansion Plans

USAID FSBAT 9 9/17/2008

Discussion and Recommendations

USAID FSBAT 10 9/17/2008

What Can Donors Do?

USAID FSBAT 11 9/17/2008

USAID FSBAT 12 9/17/2008

USAID FSBAT 13 9/17/2008

in Bosnia and Herzegovina

An Assessment for USAID

USAID FSBAT 14 9/17/2008

USAID FSBAT 16 9/17/2008

Annex A Notes on Methodology............................................................................................78

USAID FSBAT 17 9/17/2008

The goals were to:

2. Establish self-sustainable micro credit institutions;

3. Support the improvement of the legal framework for non-bank microfinance

USAID FSBAT 18 9/17/2008

USAID FSBAT 19 9/17/2008

Institution Amount in KM Current status

USAID FSBAT 20 9/17/2008

New Initiatives that Could Impact MCOs

World Bank Initiatives

1. Microcredit Organization a basic form of non-profit, credit only institution;

USAID FSBAT 21 9/17/2008

International Fund for Agricultural Development (IFAD)

USAID FSBAT 22 9/17/2008

USAID FSBAT 23 9/17/2008

USAID FSBAT 24 9/17/2008

From long being the forgotten half of financial intermediation in disadvantaged

USAID FSBAT 26 9/17/2008

Conceptually, disposable income is difficult to capture, as individuals and households can

Table 2 Types of informal savings (Robinson 2001)

Gold and other valuables -Liquidity -Security problems

USAID FSBAT 27 9/17/2008

USAID FSBAT 28 9/17/2008

Table 3 Goals and priorities in savings

When to Introduce Savings in Micro-credit Institutions

USAID FSBAT 29 9/17/2008

Good supervision of micro-finance institutions - all financial institutions mobilizing

Before mobilizing public savings, a MCO should have demonstrated good

USAID FSBAT 30 9/17/2008

Savings mobilization requires sophisticated risk and liquidity management capabilities. In