A consumer counseling center offers debt mediation and financial education
Maja (not her real name), a divorced mother of one child, had been running a small retail clothing business in the Bosnian city of Tuzla and was managing to make ends meet. But the recession gradually took its toll, and by March 2010, Maja was forced to shut her business down. Her income dropped to zero -- but she still had three outstanding loans with combined monthly payments of 350 Bosnian marks (USD $258). Maja turned to the new Center for Financial and Credit Counseling (known by its Bosnian acronym CFKS) whose staff visited her at home to gain a complete picture of her financial and life circumstances. CFKS created a Proposal for Debt Repayment which was presented to, and accepted by, her creditors.
The Credit Bubble Maja’s story is not unusual. Delinquency rates in Bosnia (as elsewhere) have risen in tandem with the global economic slowdown. As in other overheated markets, such as Nicaragua, Morocco, and Pakistan, Bosnia’s credit bubble is not the fault of any single culprit. Rather, a combination of factors such as the lenders distributing unwise loans, lack of financial understanding on the borrower’s part, ineffective regulations, and a deteriorating macroeconomy, have each played a part.
According to CFKS estimates regarding loans in Bosnia, delinquent loans more than 30 days past due rose from 3.5 percent in 2008 to 10 percent by the end of 2009. And because Bosnia only recently developed an effective national credit registry, there is also strong evidence of significant client overlap across institutions (20 to 40 percent, according to the initial feasibility study conducted prior to CFKS launch), with many customers borrowing from two or three lenders at a time.
A City Responds CFKS opened its doors in Tuzla in 2010 with start-up funding from DFID. In designing their start-up plans, CFKS drew in part upon the operating model of the non-profit debt counseling services that have been operating in the United Kingdom for more than 50 years. But they were surprised not to find examples of large-scale counseling initiatives focused on microfinance clients specifically.
Adnan Mesic, chief executive officer of CFKS since its launch, says “I think a lot of the emphasis on financial sector development has focused on institutions and markets, and left the actual client with no support. Initiatives like CFKS represent the next step in maturation. They help to even the scales.”
To date, 388 individuals with a combined level of indebtedness of over US$4.7 million (average debt of over $12,000 /person), have reached out for help from the three-person staff. While results vary per client, overall statistics are promising: in 16 percent of the cases, CFKS crafted a debt relief and restructuring plan that was accepted by both the client and all his/her creditors; and in 21percent of cases, CFKS provided training that enabled the client to resolve the situation directly.
Of course, it is important for the industry to understand the big picture, but our client is not the industry. It’s individual people who are each in a tough situation.
Adnan Mesic
However, 11 percent of CFKS proposals for restructuring were rejected by creditors and 26 percent involved the client not completing their advice service with CFKS (e.g., not returning for follow-up appointments). Mesic says, “I used to believe that if we do not get a restructuring deal done for a person, then we have failed.” But results of a recent CFKS survey have changed his thinking.
The survey, which questioned people who came to CFKS for debt relief help but ultimately left without a mediation agreement, found that 20 percent of them reported an improved relationship with their financial institution. Furthermore, a similar percentage of respondents reported that the motivational support from the CFKS staff had inspired them to take some proactive measures to address their indebtedness, and that their personal financial management skills had improved.
The Importance of Financial Education Another CFKS core service is financial education and trainings have been delivered to more than 680 participants using custom-designed curricula. Topics covered include household budgeting, the differences between types of financial institutions (e.g., microfinance institutions compared to banks), features of different savings and loan products. They are now rolling out financial literacy workshops for high school students which will be conducted by volunteers from local universities. “The importance of savings – that it is better to start small, early, than to make a huge last-minute effort – is a particular focus for our younger audiences,” says Mesic.
High school students participate in a financial workshop
A Cultural Shift Mesic stresses the notion of counseling in general represents a cultural shift in Bosnia. Men, especially, are inclined to believe that they should be able to solve problems on their own. Sixty percent of CFKS’s total clientele is female, but 80 percent of the mediation agreements involve women borrowers who, Mesic says, “walk through the door more ready to walk out with an agreement. Men want to get input and then go home and figure it out by themselves.”
Mesic makes a point of “promoting a culture where everyone stays focused on the solution.” He says, “Of course, it is important for the industry to understand the big picture, but our client is not the industry. It’s individual people who are each in a tough situation. Our job is to be the trusted mediator, keep everyone’s minds on ‘now what?’, and get them to make the deal they can make now.”
CFKS staff
Looking Forward
CFKS is currently in the process of expanding throughout the country and is obtaining a license to operate on a national level. Mesic continues to refine CFKS’ model and hopes to eventually replicate it globally. And because CFKS envisions remaining free-to-user, its ability to grow will depend upon ongoing support. In addition to DFID, and IFC which has provided financing and continues to support CFKS with intensive advisory services, CFKS donors include Oikocredit European Fund for Southeast Europe, responsAbility, Blue Orchard, DWM, and MFIs Mi Bospo, Mikrofin, EKI and Partner.
The response from policymakers has been “pretty amazing,” according to Mesic. “That the governor of the central bank would write a letter of endorsement about a start-up NGO in Tuzla – I think it speaks volumes about what we have accomplished, even though most days all I can see is the work still ahead.”
With the current surge in inflation levels in many countries in the world, the reality of microfinance will come out. What is very clear is that there has been too much money pumped into microfinance that has ended up in loans to the active poor. The challenge of over indebtedness is real as the same clients are getting loans from two or three different institutions using the same enterprise. With inflation, the cost of living has risen and the poor with inadequate financial education keep borrowing to maintain their micro business. What is needed is more financial education so that the poor can know when not to borrow and start building their savings. I commend the effort and would like to see more effort by the social investors put into financial education than investing in lending too much to the poor.
Januario Ntungwa TRIAS Uganda
22 Sep 2011
Update
Thank you all for comments and starting a discussion on the topic of debt counseling in Bosnia and Herzegovina (BH). To answer some of the questions and concerns raised. There is no such thing as personal bankruptcy law in BH at the moment, and there are no tangible initiatives to have one either. Such initiative would require significant resources, but given the fact that our government has not been established even 1 year after the general elections prospects seem dim. In addition, there is still very little understanding in the general community for those who have become overindebted regardless whether it is through their own fault or not. The need to help those people is there, however. We have seen many individuals and families who are heavily in debt with no, or very limited, prospects of finding sufficient income in the future. The reality for many of those individuals is that loan repayment is actually putting those families into the worst kind of poverty. With very weak social services in BH children of those families suffer the most, and I fear their future looks bleak too. And the debt carries on and given the current BH legislation it never dies. For such individuals CFKS tries to have a model where we offer to financial institutions a nominal payment, a very small amount, symbolic really, which will at least provide that relationship with the creditor is maintained while seeking that the financial institutions decrease pressures of collections and if possible court process. We also are seeking support from the regulators to allow financial institutions to accept certain repayment optinos offered by CFKS because BH MFI and banking regulation does not really provide too many options for FI how to restructure, if needed. So, the problem is very complex as it reaquires many different players to change their thinking, policies and procedures, etc.. We are lucky to have institutions such as IFC, EFSE, Oikocredit and others who are providing either fundig, advisory help or both which helps us in our efforts. Long term funding is a concern, and we are looking at a structure that would pull different local resources together, but for the short term more support from donors in necessary. Expanding without long term funding secured has it's risks, but if we want to gather wider support we need presence wider than Tuzla. Its kind of chicken or the egg question.
Adnan Mesic CFKS Bosnia and Herzegovina
19 Sep 2011
Great Initiative, yet I'd urge CFKS to develop and expand with caution!
Given the rather dire circumstances as a result of 'credit bubble' in Bosnia (or elsewhere), it is high time to offer counseling services in debt-management with a priority to (microcredit) consumers. Thus, Kudos to the small CFKS staff on the great and promising initiative! Yet, in potential plans for further expansion (as noted in the article), CFKS and other similar entities, should focus on finding viable and sustainable (funding) solutions that will enable them to provide impartial services to debtors. On the other hand, it would be wise for regulators in these countries to prevent any potential explosion of credit counseling agencies (like it has been the case in many developed countries: U.S., UK, Canada, Australia, etc) that do not provide debt-management services in the best interest of consumers (i.e. borrowers in distress and others). Instead, they end up becoming disguised for profit agencies that cater to their own interest and those of the lenders.For more info, you might consult the following OECD study: http://www.oecd.org/dataoecd/38/1/44509389.pdf. Good luck with your present and future endeavors.
Alban Pruthi IFC Kosovo
19 Sep 2011
Debt forgiveness?
Thanks for this interesting progress report from Tuzla: what are the protocols for dealing with those debtors who have no income and/or ability to repay due to illness or incapacity? Also, is there a personal bankruptcy or insolvency act in Bosnia which debtors can avail themselves of (perhaps as a means of forcing recalcitrant creditors to restructure or re finance debts?) Thanks again, and best of luck to all in Bosnia.
jami Solli Consumers International Italy
17 Sep 2011
Escaping the Debt Trap in Bosnia
Thank you very much for sharing this important study with the sector. It is alarming again about the sustainability of the sector undoubtedly. During last five years, I have learned a lot of lessons about the sector as mentioned below: 1) The interest based microfinance facility to the poor could not prove its effectiveness. 2) Mostly products were just paper products and were not have any concern with the needs of the clients and the markets as well. 3) Mostly MFIs did not care to keep the loans productive, thats why 94% loans went unproductive. The clients were left alone after disbursing them loans just to increase the out reach for rapid growth. 5) Particularly in Pakistan the managements of MFIs were working without the vision of poverty alleviation and the purpose was/is not to run a successful MFI. 6) The whole sellers provided funds without real appraisals and just on commission or relationship basis. Even the SBP committee on Institutional development fund is providing the facility( DIFID Funds) to such institutions, which are falling down from 32 to 22 branches with rapidly decreasing clients reportedly. The previous high officials of PPAF just took big commissions and released tranches unfairly to the MFIs. 7)KIVA loans are still being misused in Pakistan. Farz Foundation has done a pilot with the same area in Lahore, where the default ratio remained high, however only because of good screening and the will to disbursed only productive loans ( asset based microfinancing ) the recovery remained 100% with 5% late for one hour to 5 days during the recession, inflation and economic crunches etc. as well. We got three main lessons, firstly,loans must be productive. Secondly, interest based economy will ruin the world's economy at every level.Thirdly, the leadership must be handed over to the visionary leaders instead of just money makers.
