Finnfund

The threat of war in Bosnia and Herzegovina has receded but economic concerns still overshadow the future of this western Balkan country. Small and medium-sized enterprises have gained ground in the past few years and are seen as the potential backbone of the national economy, but limited access to finance is an obstacle to business development.

Microfinance offers a solution. One of the main players in the country is LOK Microcredit Foundation, which has quickly emerged as one of Bosnia and Herzegovina’s largest microfinance institutions.

“We have many strengths,” says Melnisa Begović, head of marketing. “LOK is customer-centred with high ethical standards and transparency. We have committed employees and work effectively in teams. The level of our competence is steadily improving.”

A nationwide network

LOK was founded in Sarajevo in 1997, with the support of the World Bank, as a citizen’s association for microfinance. It was re-registered as a non-profit Micro Credit Foundation in 2008, under Bosnia’s new Microfinance Law.

LOK has developed rapidly in just over a decade and is now the third largest microfinance institution in the country, measured by the size of its loan portfolio. In addition to its headquarters in Sarajevo, it has nine regional offices and about 90 branches around the country. There are over 300 employees.

The number of customers has increased rapidly in recent years and as of spring 2009, they already numbered more than 45 000. LOK’s loan portfolio totals about 130 million Bosnian marks (about 67 m. euros).

Customers mainly among the low income population

LOK offers 14 different loan products. Most of its micro and small business customers operate in the service sector, retailing and agriculture. The great majority are from low income segments of the population who have no access to formal banking services.

The global recession has also been felt in Bosnia and its businesses. Nevertheless, Melnisa Begović says that the number of loan applications LOK receives has continued to grow, although at a slower rate in the past few months.

So far there have been no considerable impairments in loan repayment rates, but some sectors have been harder hit by the recession than others.

“The economic climate has a direct effect on loan customers in retailing, for example,” Begović says. “On the other hand, new customer groups, such as in the property and the insurance sector, are now turning to the microfinance market.”

First direct investment in the microfinance sector

Finnfund has granted LOK a two-million euro subordinated loan, which will enable the organization to offer approximately 1 000 new microfinance loans to the low-income segment of Bosnia’s population.

“Until now Finnfund has made investments principally indirectly via microfinance funds which provide financing to microfinance institutions. LOK is the first microfinance institution that we have invested in directly,” explains Finnfund investment manager Peter Platan.

He points out that LOK is one of Bosnia’s largest and most respected microfinance institutions.

“Competition in Bosnia’s microfinance sector is intense, but LOK has managed to increase its number of customers faster than its competitors, by offering customer oriented loan products, and by investing in staff training and local expertise.”

Bosnia and Herzegovina strong in microfinance

Bosnia and Herzegovina in general has one of the strongest microfinance sectors of eastern Europe. By mid-2008, the combined loan portfolios of its 12 largest microfinance institutions totalled 530 million euros. Together they served about 340 000 customers.

“The country’s microfinance legislation is very advanced, and supervision of the sector is also emphasized,” Platan says.

Finnfund’s financing enhances LOK’s capitalization and catalyzes additional funding in the current difficult market situation. The development impacts of the investment are also significant.

“Bosnia and Herzegovina is a lower middle income country. Poverty and unequal income distribution are a problem, particularly in the countryside,” Platan explains. “At least a fifth of the population live below the poverty line. It’s one of Europe’s least developed countries, alongside Albania and Moldova.”

According to Finland’s development policy, Bosnia and Herzegovina is defined as a partner country recovering from violent crises. There is little Finnish business or direct investment in the area.

Microfinance achieves significant development impacts

In addition to LOK, Finnfund’s investment portfolio currently comprises five microfinance investments in microfinance funds. These funds have invested in 51 microfinance institutions, 28 of these in South America, 15 in Africa, 8 in Asia and one in eastern Europe.

Peter Platan stresses that the development impacts of microfinance are significant, as it extends financial services to low-income individuals and finances businesses that are outside the reach of the formal banking sector. This creates employment opportunities among the low income population.

“Microfinance promotes the achievement of the UN’s millennium goals, especially the promotion of equality and empowerment of women as well as the reduction of extreme poverty,” Platan notes.

For more information, please contact Mr Peter Platan, Investment Manager, tel. +358 9 3484 3327, email firstname.lastname@finnfund.fi