Since the end of the war in the former Yugoslavia in 1995, the international community has invested considerable resources in the region’s economic reconstruction. Microfinance has been a key part of the economic revival of this area, particularly in Bosnia and Herzegovina (hereafter Bosnia), although the legislative and regulatory systems in this fledgling nation are currently weak, as a consequence of inadequate post-conflict reform. Concerted action and cooperation between regulators, MFI networks and other stakeholders to advance consumer protection issues have been minimal. Although Bosnia has made positive strides toward strengthening consumer protection in microfinance, progress will be somewhat limited until further reform strengthens the capacity of the state.
Key Points about Microfinance and Consumer Protection in Bosnia:
- Bosnia and Herzegovina is composed of two largely autonomous administrative entities (see below) which are independently responsible for most policy formulation and implementation within their respective borders. Thus, supervision of banks and non-bank financial institutions (including microcredit organizations) is at the entity-level, not the state-level, and we must consider this distinction while analyzing the status of microfinance and consumer protection regulations.
- Laws and institutions regulating the banking, finance and microfinance industries in each entity do exist. There has been only limited progress toward a general law on consumer protection in either entity, however, much less a specific law for consumer protection in financial services.
- The Association of Microfinance Institutions in Bosnia and Herzegovina (AMFI), the country’s primary MFI network covering 98% of MFI clients in Bosnia, has adopted a progressive Code of Business Ethics. This code includes provisions on transparency of pricing and conditions, complaint resolution and privacy of client information. The issue of over-indebtedness is not addressed in this code, however.
After the Dayton Agreement brought the war in the former Yugoslavia to an end, the resulting newly independent nations, including Bosnia and Herzegovina, were left to reconstruct their economies and institutions, which had been greatly damaged and rendered nearly ineffective by the prolonged conflict.
The peace settlement negotiated at Dayton in 1995 created a multi-ethnic government for Bosnia at the state level while recognizing and formalizing the two internal administrative entities comprising the country, which were formed largely along ethnic lines:
- The Bosniak-Croat Federation, also known as the Federation of Bosnia and Herzegovina (Federation), is composed of a majority Bosnian Muslim and Croatian population and controls roughly 51 percent of Bosnia’s land area.
- The Republika Srpska, or Serbian Republic (RS), is home to a Serbian majority and controls roughly 49 percent of Bosnia.
These two administrative entities operate largely autonomously with significant independent legislative powers in most areas, including economic and financial policy. In reality, the state-level government holds relatively little power over its member entities and is explicitly assigned substantive responsibilities only in a few areas (foreign policy, state-level budgeting and representing Bosnia and Herzegovina in international organizations and negotiations).
Compounding the challenge of reconstruction in this socially and politically fragmented fledgling nation was the fact that it was concurrent with the transition from a socialist political and economic system to democratic capitalism. In addition, according to the UN, nearly half of Bosnia’s prewar population – over 2 million people – had been displaced from their homes, becoming refugees either internally or abroad. The majority of these people have yet to return to their homes. With the help of billions of dollars of international aid, however, as well as technical support from international aid organizations, there has been significant progress in the economic revival of the region in recent years.
The financial sector in Bosnia has grown exponentially since 1995, due in large part to three phenomena:
- Multi-lateral and bi-lateral economic actors have channeled billions in aid money to Bosnia (estimated total donor commitments since 1995 exceed USD $14 billion) and substantive technical expertise to the State- and regional-level authorities responsible for the financial sector.
- In the last decade numerous foreign banks have been granted licenses to operate in Bosnia where they originally sought to gain market share in the underserved market, which has since become saturated. This has led to a gradual increase in the size and sophistication of the financial sector and range of products offered, as well as an increase in liquidity.
- The rapid and sustained development of a vibrant microfinance sector was originally conceived as an efficient means of jump-starting the largely defunct, formerly state-controlled economy. International relief and development agencies advocated microfinance as a way to contribute to the livelihoods of a largely unemployed, displaced population without access to a functioning social welfare system. The Local Initiative Project (LIP), begun in 1996 and funded by the World Bank, provided resources, technical knowledge and a unified strategy for creating a functioning microfinance sector in Bosnia. As a result of these developments, microfinance institutions (MFIs) have flourished in Bosnia and become profitable and largely self-sustaining.
Operating in Bosnia are no fewer than 30 banks with total outstanding loans exceeding 14.5 billion KM (USD $10.7 billion). At least 22 non-profit MFIs and four for-profit microcredit companies are active in Bosnia with a combined lending portfolio exceeding 873 million KM (USD $642 million). The Microfinance Information Exchange (MIX) estimates that at the end of 2007, the number of active borrowers from microcredit institutions in Bosnia was nearly 300,000.
Due to the fact that legislative powers, including those relating to the economy and financial sector, are decentralized and held by the sub-national administrative entities (the Federation and the RS), laws governing banking and non-bank financial institutions and these institutions’ oversight are specific to the entity in which they operate. Although the Central Bank of Bosnia and Herzegovina is a state-level institution nominally charged with coordinating policy between the Banking Agencies of the RS and the Federation, its control over each entity-level Banking Agency is minimal.
In recent years, pressure from the international community and internationally-mandated Office of the High Representative (OHR) in Bosnia have driven efforts to coordinate and harmonize regulations governing banking and non-bank financial institutions’ supervision in the RS and Federation. Since 2008, the USAID-sponsored initiative PARE (Partnership for Advancing Reforms in the Economy), has had as a main goal providing assistance to the Bosnian government in “strengthening of regulatory and supervisory capacities and compliance with EU directives and Basle II core principles”. PARE and other similar initiatives provide technical assistance to facilitate the development of state-level banking regulations and establishment of a single state-level banking regulator in Bosnia. Until these initiatives are successful, however, banking and non-bank financial regulation in Bosnia must be examined on a primarily entity-level basis.
Law on Banking Agency
The entity-level Laws on Banking Agency, adopted in 1996, established the Banking Agencies of the Federation and the RS Banking Agency of the Federation of Bosnia and Herzegovina (FBA) and Banking Agency of the Republika Srpska (BARS), respectively). The FBA and BARS are the principal banking regulators in their respective entities and oversee and regulate the banking and non-bank financial institution industries. They are independent, nonprofit institutions of the respective entities’ governments.
Although the Federation and RS’s Laws on Banking Agency are nearly identical, one major difference is that the RS’s Law on Banking Agency does not explicitly mention the microcredit sector. This is surprising because part of the BARS’s mandate is regulation of the microcredit sector (which composes a major part of the non-bank financial sector). The Federation Law on Banking Agency does, however, specifically refer to the microcredit sector and its oversight.
The Banking Agencies’ activities as defined in the respective Laws on Banking Agency fit broadly within the following categories:
- Regulation: Issuing licenses for banks (and micro-credit organizations); approving the institutions’ managing staff; monitoring institutions’ operations; revoking institutions’ licenses in case of violations of relevant law; monitoring changes to capital and/or organizational structure of institutions; supervision of institutions restructuring or bankruptcy proceedings.
- Enforcement: Imposing appropriate punitive measures in case of violations of banking (or MCO) laws or regulations. These violations include those related to anti-terrorism funding statutes and/or any activity which may be “obstructive of the peace implementation process as pursued under the aegis of the General Framework Agreement for Peace in Bosnia and Herzegovina.”
- Legislation: Drafting and adopting by-laws relevant to the Law on Banking Agency, Law on Banks and other laws under the Banking Agencies’ jurisdiction.
Law on Banks
The Law on Banks provides the fundamental framework for banking regulation and was passed in similar form in the Federation in 2000 and the RS in 2003. This law enumerates more detailed regulations than the Laws on Banking Agency regarding the supervision of banks in each entity. The major areas of banking regulation included in this law are ownership structure, corporate governance, reporting requirements and consequences of legal infractions. Neither the Federation nor the RS address the microcredit sector in their Law on Banks.
Law on Microcredit Organizations
In post-war Bosnia, the microfinance sector initially consisted primarily of organizations registered as NGOs. As the sector grew and developed in sophistication, practitioners and international advisors advocated the development of a new legal form called a microcredit organization (MCO). MCOs would be non-profit legal entities set up exclusively for the purpose of microlending. This new type of entity would be easier to regulate and would form the basis for a strong microfinance sector of the type that proponents envisioned.
The existence of the MCO was formalized in the first Law on Microcredit Organizations, a version of which passed in the Federation in 2000 and in the RS in 2001. The law took a relatively similar form in both entities, however, there were a few notable differences, especially in terms of oversight. In order to strengthen MCO regulation and minimize disharmonies between the two entities’ MCO laws, a second Law on Microcredit Organizations was passed in each entity (Federation and RS) in 2006. These 2006 MCO laws remain the prevailing regulations governing the microfinance sector in Bosnia.
The laws are nominally different in each entity but in practice are quite similar. The principal difference of note is that MCOs in the Federation must first register as foundations before becoming for-profit microcredit companies, whereas in the RS they may register directly as for-profit microcredit companies. Although not explicitly addressing the over-arching issue of consumer protection, the entity-level MCO laws in Bosnia include provisions that address transparency (of pricing and borrowing conditions) and other issues of interest from a consumer protection perspective.
Key provisions of the MCO laws include:
- Both the RS and Federation MCO laws distinguish between non-profit microcredit foundations (MCFs) and for-profit microcredit companies (MCCs), both of which fall within the general category of MCOs. MCFs are legally authorized to dispense individual microcredits up to 10,000 KM in value (USD $7,353) while MCCs are legally authorized to dispense individual microcredits up to 50,000 KM in value (USD $36,765).
- MCOs registered in one entity can operate and/or open representative office(s) in the other entity provided they receive the appropriate permit from the other entity’s Banking Agency.
- Neither entity permits MCOs to accept cash deposits.
- MCOs in both the RS and Federation are required to hold mandatory reserves for the coverage of credit losses. The MCO by-laws in each entity prescribe calculations for establishing the appropriate reserve amount.
- Both entities’ MCO laws state that MCOs must clearly publish the conditions for micro-lending, including specific “provisions on the method of securing microcredits, i.e. liens over the property or rights of beneficiaries of microcredits.”
- Both MCO laws state that “A microcredit organization is obliged to disclose the effective interest rate on microcredits”. Associated by-laws in each entity specify the appropriate methods of calculation and disclosure of the effective interest rate.
In general, the Federation and RS’s MCO laws are straightforward and concise, enumerating specific regulations and oversight provisions for registration and operation of different types of MCOs. The mere existence of two separate laws emanating from two separate Banking Agencies, however, creates an unnecessarily burdensome bureaucracy. In order to improve efficiency in the microcredit sector, indeed in the financial sector as a whole, a unified Banking Agency for Bosnia must be established. This is not likely to happen, however, until the Bosnian Constitution is amended sometime in the future.
Law on Competition
The Council of Competition, an independent state-level council of Bosnia’s Federal government, adopted the state-level Law on Competition in 2005. This law is modeled on European Union (EU) competition laws and addresses market distortions and irregularities which create non-competitive conditions in Bosnia. The law defines monopolistic conditions in Bosnia and prohibits abuse of so-called “dominant positions” by monopolies. This law contributes to the general consumer protection environment in Bosnia by establishing a mechanism for the redress of individuals’ grievances against monopolies and levying appropriate penalties as needed. It does not, however, specifically address consumer protection issues in microfinance.
Association of Microcredit Institutions in Bosnia and Herzegovina (AMFI)
Established in 2000, the Association of Microfinance Institutions in Bosnia and Herzegovina (AMFI) is the primary microfinance network operating in Bosnia. AMFI currently has thirteen member MFIs which, according to the MIX, account for 98 percent of Bosnia’s microfinance portfolio. AMFI is part of the Microfinance Centre for Eastern Europe and the Newly Independent States (MFC), a regional grass-roots network of over 90 microcredit institutions in the region.
AMFI’s mission is:
- To reduce poverty and unemployment through economic development.
- To build capacity of the private sector in Bosnia and Herzegovina.
- To improve the abilities of MFIs, their management and staff to respond to challenges in the sector and continue to sustain the economic development of their clients.
- To participate actively in the national and regional microfinance industry.
- To promote the active role of their member MFIs in the economic development of Bosnia and Southeast Europe.
In 2005, AMFI implemented a progressive Code of Business Ethics of Microfinance Institutions. Acceptance and application of the code represents one of the basic pre-conditions for membership to the AMFI. By adopting this code, MFIs commit to the following principles:
- Establishing recognizable standards of good conduct and open communication with the users of their services and towards other microfinance institutions.
- Promoting the idea of responsibility, transparency and professionalism in their operations.
- Promoting the achievements of the entire microfinance sector and enhancing its reputation.
MFIs adopting this code must display it publicly and clearly communicate it to all clients. Provisions of the code are strictly enforced by AMFI which levies penalties on non-compliant institutions.
Key provisions of the Code of Ethics include:
- MFIs must apply clear, unambiguous terminology with a generally accepted meaning to facilitate clients’ ability to compare similar products or services offered by different MFIs.
- No personal information about clients may be revealed, except in cases clearly defined by law or with the client’s explicit approval.
- MFIs must implement and clearly communicate to their clients a transparent procedure for lodging complaints and redressing grievances related to the products or services provided by the MFIs.
- All information regarding pricing and terms of services (including interest rates, maturity periods and commissions) must be available at all the offices of a given MFI and submitted to the AMFI secretariat.
- MFIs must not engage in unfair competition, which includes: unreasonably low prices and remuneration for an institution’s services; unethical collecting of information about competitors; spreading any type of information on competitor institutions, especially misinformation on them or recruiting employees from other institutions in an unfair manner.
- There is no mention of over-indebtedness, however.
MFTransparency, a global initiative for fair and transparent pricing in the Microfinance industry, recently released the results of its pilot research study on transparent microfinance pricing in Bosnia and Herzegovina. All of the Association of Microfinance Institutions in Bosnia and Herzegovina’s (AMFI) member institutions, accounting for 98 percent of Bosnia’s microfinance portfolio, participated in this study. The result is the first transparent pricing data on Bosnia and Herzegovina’s microfinance sector which can be found on the MFTransparency website’s section devoted to Bosnia and Herzegovina data, along with comments and analysis.
This newly available data represents a necessary tool for the establishment of a culture of client protection in microfinance in Bosnia and Herzegovina.
The microcredit sector in Bosnia and Herzegovina has grown substantially since its inception in the mid-1990s and holds a very promising future as a driver of continued economic growth. It is hindered, however, by Bosnia’s weak legislative and regulatory environment, a consequence of inadequate post-conflict reform.
AMFI, the principal microfinance network in Bosnia, which covers nearly 98% of active borrowers, has implemented an auto-regulatory framework for consumer protection and should be considered a model for similar initiatives in the region. The implementation of comprehensive consumer protection legislation in microfinance, however, is unlikely to be forthcoming in Bosnia until further reform strengthens the capacity of the state.
These profiles are not exhaustive and have not been reviewed by country experts. If you notice a gap or error in any of the profiles, we would very much appreciate your comments about how they can be improved. In this way we can work together to expand our understanding of the variety of client protection strategies and initiatives that are being pursued in different parts of the world.