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127 Chapter Seven Bosnia’s Postconflict Microfinance Experiment A New Balkan Tragedy Milford Bateman and Dean Sinković Introduction As the small, newly independent Balkan nation of Bosnia and Herzegovina (hereafter Bosnia) began its struggle to recover from the vicious civil war that raged in the former Yugoslavia from 1992 to the end of 1995, the international development community promised its full support. One of the interventions that the international development community argued would very quickly provide Bosnia with a solid foundation for postconflict recovery and reconstruction was the microcredit model. As very many saw it, microcredit would play a central role in securing the peace by creating new jobs and incomes, addressing rising social exclusion and endemic poverty, helping to empower Bosnia’s women, and, overall, facilitating a sustainable economic development trajectory . Not long after it came to Bosnia, the microcredit sector was being portrayed by the international community and local media as having had a huge positive impact in the country along precisely the anticipated lines. This chapter shows that this uplifting narrative was almost entirely false. We argue here that the microcredit experiment in Bosnia actually represents a failed policy intervention of historic proportions. While a tiny number of individual success stories have inevitably been flagged up by the main microcredit institutions (MCIs) and their international donor community sponsors, the overall impact of the microcredit model has been to very seriously undermine the attempt to reconstruct and develop the Bosnian economy and society in the postwar period. 128 Milford Bateman and Dean Sinković Reconstructing Postwar Bosnia At the end of theYugoslav civil war in 1995, the international development community imposed upon the newly independent country of Bosnia a package of neoliberal policies and programs virtually identical to those adopted previously, and very destructively (see Andor and Summers 1998) in other Eastern European transition economies. One of the most important of the standard neoliberal policies forced upon the Bosnian government was microcredit. Microcredit was deliberately positioned to be the market-­ driven intervention that would address Bosnia’s huge postwar problems of unemployment, poverty, exclusion, and a collapse in solidarity and cooperation. In a very real sense, given the high level of resources invested, the international development community’s aim was even grander than this—it was to turn Bosnia into the global testing ground for postconflict microcredit (Bateman 2007a).1 One of the first organizations out of the gate was the World Bank with its Local Initiatives Project (LIP), a network of nongovernmental organization (NGO)–­ structured MCIs capitalized with an initial US$20 million. The globally active ProCredit microcredit banking group was also quick to come to Bosnia, and it soon had an extensive branch network in place. The handful of commercial banks that survived the civil war also wasted no time in “downscaling ” out of lending to large state-­ owned companies and privately owned small and medium enterprises (SMEs) and moving into highly profitable and less risky microcredit applications.When Bosnia’s commercial banks were later sold off to the large Western banking chains, this downscaling began to accelerate considerably. Significant amounts of capital began to flow from the banks’ head offices in Western capitals (Milan and Vienna in particular) and into their Bosnian subsidiaries in order to expand the lucrative microcredit business .These foreign-­owned banks were also better able to mobilize local savings, thanks to savvy marketing campaigns and their increased reputational capital. Finally, after 2006 a completely new dynamic emerged in the form of specially established microfinance investment vehicles (MIVs). Located in a number of “tax-­ efficient” countries (notably Switzerland and Luxembourg), these MIVs began to channel large volumes of wholesale funding into Bosnia’s MCIs for on-­lending. The result was a quite spectacular increase in the supply of microcredit in postwar Bosnia in little over a decade. By the end of 2008 the total volume of MCI liabilities to international and, to a much lesser extent, local institutions Bosnia’s Postconflict Microfinance Experiment 129 and investors was US$621 million, which amounted to 39 percent of the total volume of debt of all the nonbank MCIs in the twenty-­ seven countries of Eastern Europe and Central Asia (see Pytkowska, Koryński, and Mach 2009).2 By 2008 nearly four hundred thousand microloans were active in Bosnia, amounting to around US$770 million in a country with a population of only 3.8 million. From a base of almost nothing in the late 1990s, by 2009 Bosnia was, astonishingly , second only to Bangladesh in...


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