Microcredit finds its European niche

This week, thousands of development experts will gather at the Global Microcredit Summit in Halifax, Nova Scotia, to discuss the future of microfinance. For some, the conference comes at a critical juncture for the celebrated small-loan scheme as for-profit banking moves into an area dominated by nonprofit players.

Mohammed Yunus won the Nobel Peace Prize last month along with his Bangladesh-based Grameen Bank for turning millions of "the poorest of the poor" into financial clients with loans of less than $100. While Grameen may be an inspirational starting point, some development experts say, it doesn't represent a long-term model.

In most developing countries from Bolivia to Indonesia to Serbia, massive state owned banks ignore the little guy, leaving small-scale borrowers no choice but to borrow from exploitative loan sharks. That's why microfinance's future may be here on the edge of Belgrade, rather than in Bangladesh.

When it opened its first Serbian branch in 2001, Frankfurt-based ProCredit was the first foreign bank to operate in the country, and the only bank providing services to private companies. ProCredit fills a niche for businesses that need more than a $100 loan.

Today, ProCredit Serbia issues 7,000 loans each month and has a $354 million portfolio. Eighty percent of its loans are for less than $12,500 – well under the $38,500 the European Bank for Reconstruction and Development defines as microcredit.

"Modern microfinance has been in development for the last 30 years, but the commercial aspect has just become a reality in the last decade," says Harvard Business School Prof. Michael Chu. The for-profit model gives banks like ProCredit a stable future, unlike microlending institutions that rely on donor grants, says Mr. Chu.

Profit-oriented banks like Germany's ProCredit, Boston-based Accion International, and Indonesia's Bank Rakyat are redefining what microcredit means – while also keeping an eye on the bottom line, says Chu.

"Profit is not only needed but essential," he says. "It's the only way to be sure you're attacking the center of poverty, not just nibbling at the periphery."

ProCredit's approach in Serbia has paid off, despite increasing competition from other banks entering the market. Just 0.7 percent of its loans are nonperforming, a rate that's comparable to that of Grameen Bank and still lower than that of traditional banks. Of its loans in Serbia last year, 8.5 percent were between 10,000 euros and 150,000 euros, putting it head to head with international banks like Switzerland's Raffeisen and the German Commerzbank.

For the bank's clients, the results are tangible. Hairstylist Radovinka Andric took out her first loan from the bank in 2004 to paint the walls of her men's hair salon red, yellow, and blue. Three loans later, Ms. Andric says business has continued to improve, drawing new, younger customers and holding on to regulars despite more and more salons opening in the area.

Today, the small storefront salon is bright and clean, with a laminated sheet above the sink listing haircuts for 200 dinar (about $3). Pride of place goes to two new $400 barber chairs and a matching high chair with a miniature steering wheel attached for squirmy little boys, the result of her latest, and largest, loan.

"Painting and putting in new chairs made a difference," Andric says. "It's very important for customers to see the place is different. New customers, especially younger ones, are always looking at where they're going."

Yet even as large commercial banks and investment funds announce ambitious plans to enter the microfinance market, the challenges facing banks focused on the "bottom of the pyramid" remain formidable.

A $12,500 microloan may be peanuts to most commercial banks, but Ms. Zakanji says it takes almost as much time to analyze as a loan 10 times the size. And, despite interest rates approaching 30 percent at many microfinance banks, it's much harder to make a profit on lots of small loans than a few big ones. "That's why bigger banks usually don't succeed in the sector," said Zakanji. "Because of the specifics of our system, we're built to support this type of loan."

Since most clients are self-employed with little or no collateral to offer, the bank takes a holistic approach to credit-worthiness. They won't fund start-ups – businesses must be at least three months old, showing that clients have something invested. Loan officers are used to looking at whatever financial information they can find.

"We look at the cash from that day, their tools and equipment, if the building is rented or owned," says loan officer Tamara Cvijetic. "We're trying to find out how much they earn in a month, and what's the possibility they'll pay back the loan."

Loan applications can be rejected for financial reasons, of course, but loan officers also place great stock in personal impressions. Applications can be rejected for bad personal behavior or family problems.

"They look at the entire picture," Zakanji says. "This is not a corporation – this small company has an owner, and the owner is the main driving force and main employee of the business. We have to assess their potential to work and make payments in the long run."

Andric just applied for another loan, her fifth, to install a new heater and replace the salon's drafty windows. She also plans to install a TV to show different haircut options, and perhaps a new shampoo area. "I'm not nervous about the loans," she says. "I just can't wait to change things."