MICROCAPITAL BRIEF: Report: “Bosnia’s Microfinance Meltdown” Attributed to Accounting Control Fraud by Microfinance Institution (MFI) Managers

In a recent story on New Economic Perspectives, a website offering policy advice and economic analysis, William K Black comments on David Roodman’s article in the Washington Post, “Microcredit doesn’t end poverty, despite all the hype,” which was published on March 11, 2012. Mr Black expands Roodman’s points by analyzing the Bosnian microfinance market through the lens of the research paper published in January 2012, “Bosnia’s Microfinance Meltdown.”  The paper by Milford Bateman, Dean Sinkovic and Marinko Skare, blames the turmoil among microfinance institutions in Bosnia on senior management of microfinance institutions (MFIs). Despite microfinance being praised for “promoting bottom-up economic and social development,” the research paper indicates that microcredit in Bosnia is “radically different from the original model that was praised and received a Nobel peace prize” [2]. The research paper asserts that microcredit contributed to the current economic crunch in Bosnia, drawing a parallel to the subprime lending downturn that started in the US in 2007.

Among the factors cited as having caused the failure of the microfinance sector in Bosnia are microfinance loans being used for consumption rather than small businesses; a 50-percent failure rate for new businesses; fierce competition among new and existing businesses; over-indebtedness and multiple borrowing among microfinance customers; insufficient due diligence such as the use of credit bureaus; fraud committed by CEO’s and exorbitant financial incentives for senior managers.

The Black Model for Control Fraud, which was developed by Mr Black to explain the rise and fall of US savings and loan institutions in the 1980’s, is used to describe how Bosnia suffers from management control fraud today. The model provides a framework to predict that senior managers would forecast MFIs’ unsustainable growth; seek psychological rewards associated with being the most profitable MFI; try to enrich themselves by converting the MFI’s assets into their own and harbor resistance towards government regulators.

By Amira Berrada, Research Associate

Sources and Resources

[1] http://neweconomicperspectives.org/2012/03/microcredit-accounting-contro

[2] “Bosnia’s Microfinance Meltdown”;
http://www.microfinancegateway.org/gm/document-1.9.56293/Bosnia_Meltdown

[3] http://www.washingtonpost.com/opinions/microcredit-doesnt-end-poverty-de

MicroCapital.org article, January 8, 2010, “MICROCAPITAL BRIEF: Critics Claim that Bosnian Microfinance Institutions Simply Issuing ‘Commercial Loans Masquerading as Microfinance’” https://www.microcapital.org/microcapital-brief-critics-claim-that-bosnia

MicroCapital.org article, October 18, 2011, “MICROCAPITAL BRIEF: Center for Financial and Credit Counseling of Bosnia Offers Debt Mediation, Financial Education to Microfinance Clients” https://www.microcapital.org/microcapital-brief-center-for-financial-and-

MicroCapital.org article, February 25, 2012, “MICROCAPITAL BRIEF: responsAbility Lends $4.5m to Microfinance Institutions in Romania, Bosnia and Herzegovina, Kyrgyz Republic” https://www.microcapital.org/microcapital-brief-responsability-lends-4-5m

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Amira joined MicroCapital while working at Export Development Canada (EDC) as a Credit Insurance Underwriter. Amira holds a Bachelor degree in International Business and Finance from Concordia University in Montreal. While completing her bachelor degree, Amira spent a semester in France and upon graduation, three months in India working with non-governmental agencies, political and spiritual groups for various socioeconomic initiatives such as the advancement of women. While travelling to different cities and rural areas in India, Amira was touched by the poverty she witnessed and was dedicated to finding a way to intertwine her business interests with her passion for development. She hopes this internship in microfinance will provide the framework to integrate an element of development into her professional career as well as positively contribute to the field of microfinance. Amira speaks English, French, and Spanish fluently and has conversational knowledge in Portuguese and Arabic. In her spare time, she enjoys reading, trying new restaurants such as molecular gastronomy, restaurants made out of ice and Nicaraguan meals wrapped in banana leaves. Most of all, she loves to travel with loved ones.