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Summary of experience in Bosnia on the USAID-funded Business Finance project
October 1996 - September 1998

In June 1996, a team of U.S. bankers (on a USAID contract held by Development Alternatives, Inc.) arrived in Sarajevo to establish The USAID-funded Business Finance Project. The main office was located in Sarajevo in the offices of the Central Bank of Bosnia and Herzegovina. Branch offices were opened in Tuzla in late 1996 and Banja Luka in mid-1997.

The project's mission was to provide reasonably priced medium term financing in order to restart businesses, generate employment, and assist in the revitalization of the Bosnian economy post-war. Operationally, the Business Finance project was similar in structure to the lending division of a commercial bank.

To facilitate the distribution of lending services, the Business Finance project established an “Agent Bank” relationship with a number of the local banks. These Agent Banks were responsible for the marketing of the program and the initial credit reviews. They served as the loan disbursing agents and monitored the borrowers' business activities and the performance of the disbursed loans. The project's lending officers (expatriates) would complete the credit analyses and present a written loan recommendation to an internal credit committee for each loan. Loans approved by the committee would then be recommended to USAID's mission director for final approval.

In October 1996, the Business Finance team consisted of 11 expatriate positions. Equal counterpart positions also existed for technical Bosnian staff.

USAID established loan guidelines for the program. The maximum loan amount to any single borrower was set at US$550,000 (granted in German Deutsche Marks). Loan proceeds were used to finance working capital, fixed assets, project finance and imports needed by local businesses. Preference was given to private sector firms who could maximize job generation and revitalize local productive capacity. Overall, the loan program was designed to:

• Create substantial and sustainable employment
• Contribute to enterprise rehabilitation and expansion
• Provide enterprises access to financing at terms up to three years
• Strengthen the technical credit skills of the banking sector

I joined the USAID Business Finance project in October 1996 as a short term conflict resolution specialist to develop operating procedures for the successful coordination of the activities of the two USAID contractors managing the program (one managing the financial side and the other managing the business development side). Prior to the end of this 30-day assignment, I was asked to join the long-term lending team.

Shortly after joining the long term team, I opened the project's first branch office in Tuzla (in Northern Bosnia) and established a very successful streamline lending process. In 5 months, with one lending officer, the Tuzla office loan portfolio grew to half of the Sarajevo office's portfolio and the Sarajevo office had been operating for 10 months with 3 full-time lending officers.

In the Tuzla region I developed standardized farm budgets and lending criteria and trained the local agent banks to analyze agriculture loans for viability. The agriculture focus resulted in the project's first sector-financing package that included 17 loans totaling $3.43 million. The agricultural sector-financing package became a model for future "sector-financing" packages.

Below are some of the companies I analyzed, prepared loan recommendations for, and received approval for from USAID. As of December 2000, all of these companies are prosperous and have performed satisfactorily on all of their loan payments.

In early 1997, USAID requested a modification in the lending team to meet a loan volume of $10 million per month. I proposed a new organizational structure for the project, the lending team, and the lending procedures to help the team meet that modification. My proposal was approved and I was named Deputy Chief of Party – Credit Manager. In the second month of implementation loan volume grew to exceed $10 million each month and never fell below this level under my management. The key components of my recommended organizational structure included:

• Redefining lending officer duties (focused only on lending).
• Increased lending officer counterpart responsibilities, making them independent credit analysts.
• Enhanced job duties of many of the local staff, as well as staff at the Agent Banks to increase the operational efficiency of the project.
• Centralized all credit administration and loan documentation preparation.
• Established loan policies and lending procedures.
• Developed standardized credit application, credit analysis write-ups, loan documentation, loan filing, loan monitoring, and credit application processing.
• Developed a production model to assess staffing needs, monitor staff utilization and measure staff efficiency.

In June 1997, USAID requested that the project expand the number of staff and open a second branch office in Banja Luka (in the Republika Srpska). This office was operational and produced its first loan approvals within 30 days of USAID’s request. After a series of contract extensions, DAI’s contract expired in September 1998.

Lessons learned:

Loan volume benchmarks should not be a criteria for contractors’ performance or for award fees. USAID was under tremendous pressure to get the loan funds of the program out into the Bosnian economy. The message that is sent when a contractor's performance is tied to loan volume is that quantity and not quality (of the loan) is most important.

Lending projects should reserve for loan losses based on the lending market. In the US commercial lending market, a loss of less than 3% is considered reasonable. In the post-war, post-socialist banking environment, a loss of 30% would not be unreasonable. The project was working with a client who did not wish to see any losses.

"Relationship Banking" practices should be implemented through the Agent Banks not by the project. In the spring of 1998, the decision was made that the project should focus more on relationship banking with its borrowers. While fundamentally, relationship banking is a sound business practice in order to develop long-term relationships, this project was short term (5-7 years) and its priority, according to USAID, was to lend. The project could have been involved in the development of relationship banking (at little cost and with greater results) by training the Agent Banks to build and handle these relationships and tying their performance ratings and fees to how well they implemented it.

A loan fund that does not inject any actual cash into the economy will strain the effectiveness of the program and the cash liquidity of the Agent Banks. Bosnia is a cash society. There are no checking accounts or credit card merchants. All of the Bosnian banks were struggling with domestic liquidity – that is having sufficient cash on hand to meet daily operational needs. The Business Finance program put an additional strain on the Agent Banks' domestic liquidity by disbursing loan funds to off-shore accounts. This caused Agent Banks difficulties in meeting depositors withdrawal requests and caused delays in their loan disbursements to borrowers.

To augment the effectiveness of a development loan program, there should be simultaneous development of credit discipline and collateral reform initiatives. Collection enforcement laws and collateral reform laws would have greatly assisted the Business Finance project and the local banks.

The development of an electronic Loan management system was key to the success of the project. A Lotus Notes management information system was custom-designed by DAI personnel that allowed the tracking of a loan application from the beginning through to disbursement. This allowed for timelier and more accurate reporting, permitted the integration of standardized documents, provided for workload efficiencies, and served as an early warning system to potential bottlenecks of loan production. Some of the data collected included: employment, industry, geographic location, Agent Bank volume, past due monitoring reports, lending officer work-load, efficiency, and back log.

Sector-Financing can improve loan efficiencies and develop sector expertise in the banks. By packaging 5 or 10 borrowers of similar industries, a comparative analysis could more easily be performed on each borrower to determine their likelihood of success. In addition, certain loan officers developed industry knowledge and provided a cross reference to local “industry standards”.

Utilizing local staff in professional positions increased their knowledge-base and morale, and improved project efficiency. Originally the local staff members were considered “counterparts” for the expatriates. This role limited local staff participation, and prevented the upward flow of experience and knowledge of local systems, customs and processes - ie, they were not given the opportunity to provide "added value". Redesigning their duties as “credit associates,” who managed the Agent Bank relationships and provided the initial credit analysis, substantially improved the completeness of the credit application by the time it was assigned to a loan officers. As credit associates they significantly increased the volume of loans that could be handled by each lending officers.

For lending projects in post-war, post-socialist developing economies, a more flexible expatriate workforce is the most effective one. Successful project implementation demanded rapid responses to current events. It was evident that most bankers with 30 years or more of US commercial banking experience had more difficulty adjusting to client needs, and thinking on their feet to adjust to an environment very unlike the systematic, comfortable, commercial banking system in the US. Consequently, the Business Finance team evolved into a group of younger banking professionals who were more accustomed to the fluid nature of international field assignments in trying business environments, and more capable of the rapid (yet appropriate) responses necessary in that environment.