Documents
Country Feasibility Studies
Croatia
UNDP
Microfinance Assessment Report
Prepared
as a component of the MicroStart Feasibility Mission - May, 1997
Beth Porter, International
Consultant, and
Alain Agnikpe, National Consultant
Table of Contents
"
Women are responsible for three corners of the house.
The man is responsible for one" — Croatian Proverb
There is a dramatic need for micro and small enterprise finance institutions in Croatia. Currently, there is a significance lack of faith in the banking sector, reflected in the low savings rate. This lack of faith is linked to the loss of savings of many Croatians at the time of dissolution of Yugoslavia and due to periods of high inflation which have led people to purchase foreign currency, primarily Deutsche marks, and to invest in land and buildings. The financial sector in Croatia, as in most countries, focuses on lending to larger companies and for consumer credit (cars and mortgages) rather then lending to micro and small enterprises. In rural areas, outside of wage earners, people have very limited contacts with and knowledge of banks.
Two types of legislation exist one for banks and the second for credit unions and savings cooperatives. Legislation for the later is under review. There is significant pressure from the banking sector to force this type of institution to follow normal banking legislation which would translate into a non-enabling environment for "informal banking institutions."
New NGO legislation is currently, being prepared. There is a desire on government's part to have more knowledge of and control of NGO activities. There is a possibility that NGOs will be required to re-register to comply with the new legislation. From NGOs' perspective, the current atmosphere is not an enabling one and is therefore not conducive to the entry of new International NGOs and to the creation of new local institutions.
NGOs activities and funding have primarily focused on humanitarian assistance. This source of funds is currently drying up. There will be a lot of competition for the limited funds available for sustainable economic development. This will result in a large number of NGOs both local and international closing down operations in Croatia.
Donors have focused primarily on humanitarian assistance As UNHCR and other humanitarian organizations phase out operations there is a lack of new organizations providing funding for long term economic development. Bilateral aid from donors such as USAID and Japan has focused on humanitarian aid. Due to its GDP Croatia is not normally entitled to receive development assistance from these organizations. The World Bank plans to open a full office in Zagreb some time this year which may be a source of funding for microfinance. The main focus of development banks (EBRD) is on larger productive credits to small/medium enterprise.
There is a dramatic lack of both local and international NGOs with experience in the area of microfinance. The two most active NGOs are CARITAS/CRS with national coverage and the NOA/Opportunity INTL. operating in Osijek. CARITAS has made two hundred and one (201) loans and NOA/OPPORTUNITY INTL. forty one loans.
There is also a significant lack nationally and in the project area of local institutions and associations. Five years of living in a war zone and being displaced has had a dilatory effect on the creation/emergence of associations. The majority of inhabitants have also had negative experiences with cooperatives. Although people are not against the creation of such associations, there is also a lack of experience and know how to do this. Local Development Councils (LDCs) have been created in the participating municipalities. The initial mandate of these LDCs was to assist in project surveys. LDCs can perform a role in helping to channel know-how to the municipalities. Currently, LDCs lack the representationality and experience to be the sole basis of a credit program. (Return to top.)
Croatia has a population of about 4.8 million with a highly educated workforce of about 1.5 million. In 1996 Per capita income in Croatia was $ 3,750. Unemployment in Croatia in 1996 was 15.9%. Since 1990, unemployment has averaged about 14.43% (Source Central Bureau of Statistics). With an area of 56,600 square kilometers population density averages 84.5/square kilometers. The five municipalities of the Šibenik Hinterland cover an area of 1034 square km which constitute 56% of the county's total surface In the Šibenik hinterland the prewar population density was 32.87 per square kilometer at the present time it is 10.71 per square kilometer. In the Šibenik hinterland only 35-40% of the land area (about 400 square km) are flat areas, valleys and plains that can be used for agricultural production.
As stated in the World Bank's Country Overview, economic output is similar to that of an industrial market economy with manufacturing accounting for about 30 percent of GDP, agriculture accounting for about 12 percent and services accounting for 60 percent. Imports and exports of goods and services are approximately 80 percent of GDP. This makes Croatia one of the most open economies in Central Europe.
The official currency of Croatia is the Kuna. Foreign currency particularly the Deutsche Mark are in wide circulation. Citizens can hold foreign currency accounts and loans are sometimes tied to a foreign currency (Deutsche mark)
Inflation is currently stable at (3.5%). In 1993 inflation was 1,150 %. Since the 1995s, inflation has averaged 3.63. Current inflation estimates by the Croatian Investment Promotion Agency (January 1997) for 1998 and 1999 are 3.5% and 3.3% (Return to top.)respectively.
There are 61 banks in Croatia. Sixteen banks (26%) are wholly or majority-owned by the government. Forty other banks (66%) are wholly or predominantly under private ownership. Five banks are majority owned by foreign banks. The two largest banks, Privedna Bank Zagreb and Zagreba ka Bank, own 50 percent of assets in the banking sector.
Commercial Banks are free to fix their own interest rates. Interest rates vary from 11% to 22%. Short term credit rates average about 19%. Loan periods are from three months to five years.
The banking sector is suffering from serious liquidity problems due primarily to bad loans. Companies and banks are closely connected. In the past, private companies owned banks and banks in turn also owned private companies. The government restructuring program is focusing on sanitizing the portfolio of the largest banks so that they can restart on a sound financial basis.
Due to high inflation rates and previous experiences with loss of savings, during the collapse of former Yugoslavia in the early '90s, people avoid keeping savings in banks. Despite the ongoing reform of the banking sector and the presence of private and foreign banks, Banks are often viewed as part of the state. In fact, all internal transfers of money go through a state clearing house. Procedures of the largest banks are often extremely cumbersome. In general, there are few loans for start-up business. Loans are primarily available to large companies, SMEs and associations but much less available to individuals. Loan documentation for commercial loans is extensive. Loan documents include a business plan audited financial statements, if requested, application form (amount of credit, purpose, description of economic activity, evaluation of companies performance, evaluation of market position, references, plans for future activities, cash flow plan indicating capacity to repay the loan, instruments of insurance.)
Property guaranties are widely used. The value of the property must be 50% percent higher than the loan amount. This is written in the local land registry other types of guaranties include insurance instruments. Guaranties such as equipment leasing are not well known.
Since the majority of savings are not being banked, this means that there is a large informal financial sector based primarily on hard currency. People save primarily in hard currency and in real estate. Other than salaried personnel, who are being paid through bank transfers, people in rural communities do not use banks very much as thus are not aware of bank credit conditions. The quantity of documentation and the legal status requirements of an officially recognized business effective create a high barrier to use of banking services by micro and small entrepreneurs.
Government programs such as subsidized credit through the Croatian Bank for Reconstruction and Development and the National Guaranty Program tend to add to the unwieldiness of the commercial banking sector. Instead of decreasing the amount of documentation this is increased and operations end up being more centralized rather than less. (Return to top.)
D. Credit Union, Savings Coop/ Ngo Legislation
The law concerning the creation/operation of credit unions and savings cooperatives is currently under review. Bankers want credit unions and savings cooperatives to face the same regulations as banks. If bankers are successful in their lobbying attempts, this will have a negative effect on local association's ability to create credit unions and savings cooperatives. Currently, permission to create a credit union/savings cooperative must be obtained from the National Bank of Croatia.
NGOs have provided humanitarian credit which has primarily been grants. As they move toward a sustainable micro finance mode, government approval is more difficult to obtain. In some cases, if credit is not in the original charter of the organization organizations have difficulties in obtaining permission to carry out these operations. Also, NGOs are not allowed to mobilize savings.
NGO's are provided with a tax exemption for bringing in humanitarian aid. However, they do pay taxes on staff salaries. These taxes which can represent more than 100% of the employee's salary have been a source of contention between NGOs and the Croatian Government. In the case of NOA which is registered as a limited liability company there is no tax exemption.
NGO legislation is currently being reviewed. A new law has been drafted and is under discussion. In general, the new draft is more restrictive of NGOs activities. Under the proposed law, NGOs would be required to re-register. Unless stated specifically in the NGOs charter, it would be very difficult for NGOs to generate any revenues. A government official could forbid NGO activities if they consider those activities to be against the country's laws and constitution. New heavier penalties for NGOs are proposed. According to the new draft law NGOs would have six months to constitute its board and register the organization.
The new regulations are likely to make it much more difficult for NGOs to be created and to operate. This is happening at a time when humanitarian assistance is drying up. Many NGOs who are unable to adapt to the new conditions will close down. This happens at a critical time when NGOs and local associations could play an important role in assisting in long-term economic development of the areas where they are working. (Return to top.)
Company registration of a limited ownership company costs about $1,000 and takes about six months. A company must have about 5,000 DM in assets to register. Companies are registered at the Central Bureau of Statistics (National Classification of Industries).
Under the law individuals may have a small home business as a second economic activity. This can be registered in the local municipality.
There is a unique tax rate for entrepreneurs. In 1996 the tax rate was 25 percent. In 1997 it increased to 35 percent. (Return to top.)
F. Government Enterprise Policy
The primary focus of the Croatian government's policy is the creation and reinforcing of small and medium size productive enterprises. This is reflected in the national credit programs being carried out by the Croation Bank for Reconstruction and Development and the National Guaranty Agency. The National Guaranty Agency provides an 80% guaranty to entrepreneurs. However, the agency itself requires substantial documentation which is difficult for micro and informal entrepreneurs to provide.
In the area of agricultural credit government policy is to maintain subsidized credit rates of 4-7 percent which have been traditional is this area. A special law has been put into effect concerning "special care areas." Under this law, government credits are made at an interest rate of 4%. There is also a reduction in corporate income tax for certain firms. In order to qualify firms must operate the company or subsidiary in the area. The corporation must employ at least three people for no less than nine months in the year. This entitles the corporation to calculate fifteen percent of interest on equity capital thereby reducing the corporation's tax base.
For craft workers who pay personal income tax the protective interest for equity capital is twenty percent. Individuals who receive income from the agriculture and forestry industry do not pay taxes if they rent or own land in the affected areas. Entrepreneurs in war torn areas benefit from a tax reduction. They are required to pay half of the current rate. (Return to top.)
The vast majority of donor funds in the business sector are focused on SMEs. The three principal donors in the area of micro-finance are CARITAS GERMANY, USAID and UNHCR
EBRD
The EBRD provides funds to ten programs for SMEs in agriculture, crafts, and industry. Loan amounts vary from $ 250,000 to $3.5 Million. These programs are generally done through the HBOR/Croatian Bank for Reconstruction and Development. Commercial banks are paid a 1 percent intermediation fee.
HBOR/Croation Bank for Reconstruction and Development, which is state owned, has three programs for SMEs. The Reintegration of Croatian Returnees from the Federal Republic of Germany financed by the German government, Small and Medium sized private entrepreneurship development financed in part by KFW bank Frankfurt and Development of Small Enterprises on liberated, War devastated and underdeveloped areas. This program targets companies, SMEs which are 50% privately owned, have less than 200 employees, and at least two years of experience in the area proposed for the investment. The maximum credits under this program are $ 250,000. Loans period can be from four to seven years. The interest rate is currently at 10% but is adjustable. The programs focus on modernization and expansion. Funds are made available to twenty-eight commercial banks. Four banks in the Šibenik area are involved in this program.
UNHCR
UNHCR is the premiere international organization involved in humanitarian aid in the war torn areas of Croatia. The organization prefers to work through NGOs, local organizations and municipal governments and avoid direct implementation. UNHCR, whose mandate ends in 1998, has been one of the primary sources of grants for local and international NGOs in the area of humanitarian assistance, economic development and business training. UNHCR main focus is on rural areas. Although UNHCR is interested in durable solutions, its time frame limits the impact that it can have on sustainable institutional and economic development. UNHCR is using Quick Impact Program methodology which focuses on giving beneficiaries basic inputs such as an agricultural tool kit (ex. tools, seeds and a dozen chickens) which will allow them to be immediately functional. UNHCR has funded training of women's groups, basic book keeping, and small loan programs in which participants are provided with inputs or loans averaging about US $ 1,000. Since there are also humanitarian concerns including reconciliation, UNHCR credit programs rarely require 100% repayment or interest.
UNHCR's experience with CRS/CARITAS in Croatia has been very positive. In fact, they asked CRS/CARITAS to submit a proposal for the Kinin area which is next to the Šibenik hinterland. This project may be for an amount of $ 800,000. UNHCR's experience with the local NGO Faust Vran i has also been very positive. In addition to their work, UNHCR has also been impressed with their ability to diversify their funding sources. UNHCR's experience with the International Rescue Committee has been less than satisfactory. UNHCR recently reduced their grant by $200,000.
The UNHCR has a fund of $350,000 which is available for direct implementation this year. This is a fund which could potentially be available to the UNDP/UNOPS project in the area of basic agricultural production in the Šibenik hinterland.
USAID
USAID'S assistance is focused primarily of humanitarian assistance in war torn areas. USAID has provided US $ three million to Opportunity International to develop a credit union and micro/small enterprise lending program in Osijek, in Eastern Slovonia. As the worn torn areas return to normal, USAID does not plan to fund economic development programs because Croatia's GDP is higher then their traditional cut off level for USAID assistance. Staff involved in the credit/economic development sector felt that US $ 1,000 - US $ 3,000 was an appropriate range for microfinance loans in the Croatian context.
World Bank
Croatia joined the Bank and the International Development Agency (IDA) in February 1993. The World Bank program in Croatia focuses on three major themes in the government's reform program: 1). Reforming public finance, 2). Encouraging private sector growth and 3). Rebuilding and upgrading infrastructure. To date, the Bank has committed US$279.5 million to Croatia for six operations. In March of 1996 the Bank approved a US$17 million loan to finance the development of support services for individual farmers. The Bank's Board also approved a US$5 million loan to finance studies and advisory services to support the Croatian government's reform of the enterprise and financial sectors. At the present time, the Bank does not have any projects in the area of microfinance although it is financing a microfinance project in Bosnia. The Bank is planning to open a full office in Croatia this summer. (Return to top.)
H. Ngos In Micro & SME Finance
There are very few NGOs operating in the field of micro-finance. NGO activities tend to focus on the area of Eastern Slovonia and on humanitarian aid. This is understandable since this is also donor's main area of interest. Credit programs tend to have modest accomplishments 6-15 loans and are often made either as grants or with partial repayment terms. International Rescue Committee has a program in which participants repay 20% of the loan.
The two key players in Micro/SME finance are CARITAS and NOA/OPPORTUNITIES INTL. CARITAS is providing credit throughout the country (Zagreb, Zader, Šibenik, Split Rijeka and Djakovo) and NOA a local credit union is operating in the area of Osijek. Both of these organizations are applying commercial interest rates. In the case of NOA/Opportunity Intl., the objective is to create a financial sustainable credit union.
NOA & Opportunities International
NOA is a local credit union which was founded in October 1996 in Osijek. Registration, which was done under the 1989 law on savings and loan institutions, took five months and was done at the commercial court in Osijek. Informational discussions were also held with the Ministry of Finance and the National Bank. As a credit union it follows rules similar to those of a limited liability company and is subject to taxes. The question of tax status is still being discussed in Zagreb. Credit operations started in January of 1997. NOA receives technical assistance and financial support from private individuals (donations and technical assistance) and from Opportunities Intl. Opportunities Intl. is funded by a $3 M grant from USAID/Croatia.
Opportunities INTL. provides on-site technical assistance in the area of management and credit analysis/procedures. Opportunities INTL. also has a regional office in Vienna which provides technical backstopping to the project. To date sixty-seven (67) have been made and forty-one (41) loans disbursed. NOA staff has processed six hundred and eighteen (618) credit requests. Eighty percent of loans have been made for agriculture, cattle and equipment. Twenty percent have been made for small business (optometrist office, agricultural spraying etc.). Maximum credits are $20,000 there is no minimum. Credits average about $8,862.Of loans disbursed 78 percent have been to men and 22 percent to women.
Interest rates are 15% for short term loans up to six months and 18% for twenty-four month loans. In addition, there is a 2% up-front transaction fee. One of the main problems that the project has faced is resistance to the loan terms from Local Government Officials and the general public's misunderstanding of microenterprise.
NOA provides assistance to clients in developing a cash flow for their business. NOA's board includes several professors and financial experts who provide assistance in this area. They find the cash flow exercise to be a very useful tool in getting clients to be realistic about their cash needs. Board members feel that training including cash flow analyse and business plan preparation are critical ingredients to their client's success.
This fall, NOA/OPPORTUNITY INTL. will inaugurate a group lending program along the lines of the Grameen bank model.
CARE Intl.
CARE Intl. has a regional office in Zagreb which covers Croatia, Bosnia & Hercegovina. They have currently submitted a funding request to the World Bank in Sarajevo for funding of a micro finance institution which will be based upon the Grameen Bank model. This would provide loans from $ 300 to $ 3,000 to members of solidarity groups. CARE INTL. hopes that the World Bank will fund a similar micro finance project in Croatia.
Caritas/Catholic Relief Services
CARITAS has created a loan guaranty fund operating through the Zagreba ka Banka. Funding for this program has been provided by CARITAS Germany. CARITAS/CRS has negotiated a multiplier of four times the amount of their guaranty. This translates into an amount of US $ 2.059 million currently available for loans. To date they have made 201 loans, nationally. Under the program loans can be up to US $ 11,765. Overall loans average in size from US $ 2,940 - US $ 4,700.
In their agreement with the bank, CARITAS is responsible for field visits( assessment of business activity/client character and loan follow-up). The bank is responsible for undertaking a credit check and signing the loan contract with the client. In each of the areas covered by the program, there is a region credit manager who is a CARITAS employee. Technical backstopping and logistical assistance is provided by CARITAS/CRS headquarters in Zagreb. (See also NGOs operating in the Šibenik hinterland)
Delphi Intl.
Delphi is an American NGO with headquarters in Washington, D.C. Delphi International. A local institution was created in Zagreb in 1986 to provide assistance to women's groups in the Adriatic countries. In 1993 the local institution started up the Star project funded by USAID ($2.1 M. For a three year period) and $800,000 through private funding. In 1994 the local institution decided to link up with Delphi INTL. which was selected to provide additional technical assistance to the local institution. The focus of the Star project is to empower women through conflict resolution, organizational development, communications, micro enterprise and income generation and through public policy advocacy. Current organizational focus is primarily in the area of micro-finance & business advisory services. Delphi INTL. is currently starting up a one year project in Bosnia financed by the World Bank, UNHCR and private foundations to provide micro enterprise education and training. This program will be coordinated by Leesa Wilson who has a background in micro finance gained from work done in St. Petersburg.
Delphi INTL. has also started working with a local NGO based in Zagreb called PROFOSA (Center for Professional Independent Women). In addition to training of sixty-two participants in business/credit skills, Delphi INTL. has provided PROFOSA with a sub-grant for funding micro enterprises.
Delphi INTL. has collaborated with twenty-four local organizations throughout Croatia. Existence of a local preexisting NGO is a condition for receiving training and technical assistance from Delphi International. Delphi INTL. does not currently work with any local NGOs in the Šibenik area.
Delphi INTL. has provided training to women's groups throughout the country. Two hundred women received business preparation training. In the business training the first session is provided for free. Those clients who which to pursue creation of an individual business plan must pay for additional assistance. In Osijek they have assisted a local NGO with a portable green house project in which women (80) received portable green houses to use for income generation.
International Rescue Committee
This international NGO started operations in Croatia in 1992. IRC is primarily funded by UNHCR in Croatia. To date, the principal focus of their activities has been on humanitarian assistance. They have recently started a micro enterprise initiative with What Works for Women a Boston-based group which focused on refugees and particularly on women beneficiaries. Current project activities, in Western and Eastern Slovonia, include both credit and book keeping training. Credit is primarily for agricultural activities 75% and 25% for services. Credits amounts are $1,000. Payments are made in kind. Beneficiaries are required to pay back 20% of the loan. This project is making its first six loans.
The International Rescue Committee started its SME program in 1993. They currently have two local staff members responsible for coordinating the program as well as an expatriate technical advisor. Financing for this program is provided by UNHCR. SME staff feels that loans from US $ 5,000 - US $ 10,000 is more appropriate for micro and small enterprise loans in the Croatian context.
CNA Veneto Euro-In Consulting
CNA Veneto is the regional branch of the National Confederation of Small and Medium-size enterprises (SMEs). A membership of 300,000 make it one of the largest and most representative association of private industrial and service enterprises in Italy. Euro-In Consulting is the specialized network promoted by CNA Veneto for the purpose of running its business advisory services at the international level. CNA Veneto Euro-in Consulting is a non profit/non governmental organization. Funding for the project in Croatia which started in December of 1996 is provided by the Italian bilateral cooperation (Ministry of Foreign Trade) and by CNA Veneto Euro-In Consulting. This funding is provided for an initial period of one year ending in December of 1997. This period can be extended for an additional six months.
The project's aim is to assist in the creation of 2-3 guarantee funds in Croatia and the same in Slovinia. The purpose of these funds is to improve SMEs access to bank credit, at the local level, by providing collateral to guarantee the loans of members. As the fund increases in size, it allows members to obtain larger amounts. Past experience has shown that banks are also willing to increase the funds multiplier.
Funds in the form of cash or liquid assets are made available at the local level either through local entrepreneurs, local authorities, projects or state institutions. The fund is used to guaranty credits at below 100% in order to share the risk between the two partners.
The project is currently discussing with potential partners in four areas: Istra, Rijeka, Zagreb and Split. Some of the problems that they are facing are:
* A legislative framework which is not perfectly matched with the specific needs of non-banking independent financial institutions.
* Lack of NGOs and non-banking financial institutions able to deal with small/micro loans.
* Lack of financial resources to be contributed to the guarantee funds.
Creation of new organizations and/or the transformation of existing ones could allow these organizations to provide financial services which are in compliance with existing legislation.
Euro-In Consulting is willing to provide technical assistance including training sessions to any local institutions interested in operating a guarantee scheme who met project criteria. They are also willing, in conjunction with the project, to provide technical assistance to local banks interested in the guarantee fund to help strengthen their skills in Micro/SME credit assessment.
Euro-In Consulting is also willing to assist in bringing about legislative change to further develop the finance and banking sector.
Lastly they are willing to provide assistance to regional development organizations which could represent more dynamic counter parts at the local level. The mission was favorable impresses with both the dynamism of Euro-In Consulting as well as the nature of their program and potential interventions. (Return to top.)
I. Šibenik Hinterland Regional Development Programme
The Šibenik Hinterland RDP was started in 1996 with a budget of US$ 1,669,800. The project currently has a budget of US$ 1,961,5500 of which US$ 680,000 is earmarked for credit. The length of the project is four years.
Programme Objectives
The programme objective is to facilitate the return and peaceful reintegration of the 22.900 displaced people who are presently living on the coast (Šibenik and Split), in other parts of the country and abroad to their homes in the hinterland areas of Šibenik County without any discrimination as to ethic origin. Specific objectives include:
1). Economic Development and Employment, rehabilitating agricultural and livestock production, in the area, ensuring a minimum income of US$500/month per family, to provide employment opportunities through small-scale family businesses for returnees with an urban profile.
2). Health and Sanitation. To improve health conditions in the areas of return and provide, on a permanent basis, clean and safe water to the returnees.
3). Education To facilitate returnees' children attendance to schools by rebuilding and equipping the destroyed basic education buildings.
4). Housing To ensure decent lodging conditions to the returnees. Through the reconstruction of 3.400 destroyed dwellings.
5. Small Community infrastructure and Communications To ensure that farmers will be able to market their agricultural production by repairing the destroyed communication net: small rural roads, paths and bridges. 6). Social Safety Net To facilitate the return of the vulnerable groups, mainly the disabled and elderly, during the arduous transition from emergency to development.
7). Demining To avoid mine casualties and allow a safe resettlement of the returnees and their children; to clear the mined agricultural areas, allowing the farmers to cultivate their land.
8. Strengthening of Local Government To ensure the participation of the beneficiaries through the Local Development Councils; to strengthen their organizations and their capacity for self management.
Additionally the project addresses the basic needs of both the local (those who already returned and the displaced populations to enable the latter to return to their homes in the hinterland of Šibenik County (source RDP document February 1997).
The project is operating in an area where rural migration started in the 1960's and in a worn torn area where the traditional focus is on humanitarian aid provided by the government and donors such as UNHCR. The project faces a double challenge in trying to reverse a preexisting economic trend and differentiating itself from government and humanitarian aid organizations. In fact, the government has promised a lot of the items mentioned in the RDP's objectives to their displaced citizens.
Structure of Local Economy (Project Area)
Before the war the local economy was based on three primary areas: Tourism, and factories (primarily in the coastal areas), and mainly subsistence agriculture in the "hinterland." As indicated in the project's Regional Development Program survey 45% of the families depended on revenues coming from two sources wage employment and subsistence agriculture, supplemented, in some cases, by foreign exchange transfers coming from family members living abroad. Only 20%lived on livestock and agriculture alone. 79% of families had agriculture and livestock production as a secondary economic activity. After spending the morning and early afternoon in the factories and wage employment people often returned to their rural communities to work in their fields and small animal husbandry projects.
Transition to a market economy, coupled with the effects of the war, have changed the former economic equilibrium and accelerated trends such as rural exodus. Most of the factories have been closed either because of war damage or due to obsolete technology. In the short term, there has been a large decrease in tourism. Although tourism is coming back, it will probably take 3-5 years before it returns to prewar levels. Until the future of displaced people currently living in the larger hotels is resolved, important infrastructures are not available to the tourist trade.
Although rural communities near the coast have produced some products for the tourist business, many of these products have been produced outside the area and brought in by private companies. In the communities, which are not near the coast, there has been much a greater focus on subsistence agriculture and productions of small amounts of cash crops (olive oil, grapes, walnuts, almonds and ham.
Cash crops have been and continue to be sold primarily to some private and state companies run the coastal area. Factories for wine, olive oil and proceutto (smoke ham specialty of the region) are currently operating in the towns of Dernis, Šibenik, Split.
The average agricultural household has 2-3 hectares of land which are shared among field crops and vegetables for home consumption along with perennial cash crops. Agricultural land in the area is, in general, very rocky suited to vineyards, oil trees and sheep and goat grazing. Valleys in which a large mechanized agriculture can be implemented are very limited.
People working in factories or wage employment often have checking accounts. Savings accounts are much more limited. The majority of people in the hinterland are involved in the informal sector particularly in their secondary economic activities. Access to commercial credits has been extremely limited even before the war. Knowledge of banks and banking conditions "interest rates, grace periods" is extremely limited. Because of the informal nature of the economy and due to inflation families put money into house construction and purchase of land. In many people's minds, in the rural communities, banks are linked to the state. Which has also translated into a tendency to not take reimbursement of credits to seriously.
Traditionally, in many of the rural households several generations would live in the same house as child got older and married often an additional floor would be built onto the house to incorporate the new household. When the factories started operations on the coast government policy was to encourage young people to move to the coast through creation of subsidized apartment buildings. Changes in the area's economy have and will continue to accelerate the trend away from the extending family living structure.
Credit Demand
A direct survey was undertaken with potential beneficiaries outside the framework of LDCs and Displaced People Committees. The results of the survey were the following:
a). 16.96 percent would like to work only in agriculture
b). 3.24 percent only in livestock
c). 57.05 percent wish to combine agricultural & livestock production
d). 1.81 percent would like to work in trade
e). 12.27 percent would like to start up a business
Of the remaining 8.67 percent 6.86 percent want a job in the private or public sector and 1.81 percent didn't reply to the questionnaire.
Average estimated yearly per hectare production costs for vegetables and field crops was calculated by the project to be US$ 2,600.77. Average year one cost for fruit trees and other perennial crops was US $6,711 per hectare. If vineyards are removed from the list the year one per hectare costs fall to US $ 5,810. The project estimates that one hectare of annual commercial crops or half and hectare of perennial crops will produce an average yearly income of US $ 5,600
Average per family total investment for the animal husbandry models, excluding infrastructure and labor costs is estimated at US$ 21,084. The models are based upon the assumption that they should provide a minimum average of US$ 500/month cash income (US$ 6,000/year).
Average agricultural loans were estimated at US$ 3,000, livestock production at US $ 7,000 (fifty percent of investment) and small enterprise loans at US $ 5,000. The project estimated that 65% of total beneficiaries would be willing to sign up for loans. Other assumptions are that 55% of beneficiaries would ask for agricultural production loans, 26 percent for live stock production and 19 percent for small business/agro-industry. The estimated credit need was evaluated at US$ 24,400,000.
Although we are in agreement that agricultural and livestock production must be larger than before to be done a commercial basis, the assumption of a US $ 500/month income appears to be inflated when one considers that the current per capita income in Croatia is US $3,750. If one also factors in beneficiary participation in the other models for small business and field crops this would also considerable reduce the estimated credit need. Although 65% of the people may be interested in applying for credits it is unlikely that 65 percent would qualify if a strict set of criteria are applied to the credit application process.
Project Proposed Credit Model
The project proposes a credit model which would start off as a trust fund providing 100 percent of the capital for loans. This would be implemented through a bank operating in the area. The model is based upon the assumption that banks will eventually be willing to take over lending to these clients, in the absence of a project operated guaranty. After a period of 12-18 months this would be transformed into a "credit insurance scheme" in which the fund is providing an additional guaranty. The project staff estimates that such a fund could be used to leverage three times agricultural loans and six times small business loans.
Banks, Šibenik Region
Several banks both national and regional have offices in the area. The regional bank is the Jadranska Banka. The banks with national coverage are the Croatia Banka, the Privredna Banka and the Zagrebacka Banka which is linked with the Pomorska Banka of Split. All these banks concentrate primarily on non-enterprise credits. At the present time one of the most popular credits is a consumption credit with no purpose for $6,000. These credits are given to wage earners who have a steady income and who have guarantors.
Some agriculture and enterprise credits are being given to some small and medium size enterprise. These subsidized credits are primarily through the credit program of the HBOR/Croatian Bank for Reconstruction and Development. The Jadranska Banka is the primary bank in the area accessing credits through the Croatian Bank for Reconstruction and Development. The National Guaranty Program is known but the program's impact in the area has been negligible to date.
Commercial interest rates in the area vary from 12 to 18%. Agricultural credits interest rates average about 4 percent and are subsidized by the Croatian government either through the Ministry of Agriculture or through the Habor/Croatian Bank for Reconstruction and Development.
Nationally, Croatian banks prefer loans that are guarantied by mortgages and wage earners. The banks are much less familiar with other types of guaranties including leasing. The difficulties with the mortgages as a guaranty in the "hinterland" is twofold. Due primarily to the war and also to the nature of the society, official documents which can be registered are none existent in most cases. Municipalities are in the process of dealing with this problem which should be solved during the next two years. A more critical problem is that bankers in the area consider that mortgages in the rural areas are not a viable form of guaranty because they can't be realized. Since all the people in a community know each other no one is willing to purchase a property which will result in someone losing their house. F. Ministry of Agriculture
The Ministry of Agriculture has several national credit programs including one for tractor purchases. In the tractor credit program four hundred and eighty tractors will be distributed across the nation. Organization of these credits is carried out by the Croatian Bank for Reconstruction and Development and at the local level by municipalities. Interest rates are 3% with a two-year grace period and an eight-year repayment period.
Rural Associations
Traditionally, people in rural areas and elsewhere have operated in the informal sector and are experts at "beating the system." In general, there is a suspicion of cooperative structures, banks and government. People understand that the local economy has changed and that they need to take their future into their own hands. This creates a certain fear because they are moving into an unknown area in which they have serious knowledge gaps.
Associations and organizations are practically nonexistent in the hinterland of Šibenik. In the past, there has been some experience in working with cooperatives. This experience was primarily negative because operations were often not transparent and ownership in the cooperative was unclear. In some of the municipalities visited, a few people, see the need to form new cooperatives based along professional activities (ie almond growers, ham producers . . . )
Creation of new organizations is hampered because many people are focused on primarily activities concerning finding wage employment, rebuilding their houses and getting some subsistence agriculture activities started. Another difficulty, regarding the creation of new associations and organizations, is that many displaced people have not yet returned to their villages.
As the area returns to normal conditions, there is a dramatic need to do community development work to introduce beneficiaries to the advantages of associations and on a more practical level to assist in the creation and successfully management of associations and organizations. At the present time, there is a major knowledge gap in this area.
Local Development Councils
As part of the Šibenik Hinterland Regional Development Programme, Local Development Councils (LDCs) (fifteen members each) were formed in participating municipalities. Displaced committees were also formed in the major hotels where displaced people are living. Each of the main villages/hamlets elected a representative or more according to the number of inhabitants. The initial function of these committees was to assist with the community surveys during the first months of the project. LDCs are composed of staff from the municipalities and members of the municipality.
During the mission meetings were conducted with each of the LDCs. In each meeting, LDC members were asked about their experience with coops, associations and banks. Three different credit models were presented to participants and a discussion held as to the advantages and disadvantages of the three systems. The purpose of the presentation and ensuing debate was to evaluate participants' commitment to long term economic development as opposed to humanitarian assistance. With the exception of the LDC of Ru i all the LDCs participated in the debate and were interested in gaining additional information. In the case of Ruzic , although some members did tell us that they understood our message after the meeting, there was a strong negative reaction because participants were tired of discussions and wanted to know when moneys would be available for economic activities. Members of the Ruzic LDC also were not interested in paying any interest.
One advantage of the LDCs is that they have a number of well-educated members who can explain concepts to members. The LDC for the most part have a clear understanding that there is a need for long term development programs as opposed to short term ones.
There is an issue of representationality and also of political patronage in the LDCs. Almost the totality of members are men and in some LDCs there are primarily young men. As such, they are not representative of the demographics of the area. Since the LDCs are directly linked to local government there is a potential danger of political patronage.
Although some of the LDCs were dynamic and had clear ideas about how to bring about development in their communities major changes need to be made if they are to be used as effective community development organizations. In general, at the household level, economic decisions may be made in a relatively democratic way. What is clear from the selection of LDC members is that women have a representational problem at the community level.
NGOS (in Project Area)
a. Faust Vran i
There is one local NGO Faust Vran i based in Šibenik. This local NGO was created in 1994. Their primary activities are operating a house for the elderly and elderly visits and a program for children. One of their long term goals is to act like an international NGO in providing assistance to local NGOs and associations. This local NGO was founded by ten people and currently has twenty-five members including financial experts, lawyers, social workers and doctors. Faust Vran i is registered as a local NGO with the county of Šibenik and with the Central Bureau of Statistics. They have received funding, more than US $ 1 M, from a variety of sources including CARE INTL., which provided funds and assistance in 1993, UNHCR, Croatian government, and the city council of Šibenik.
Faust Vrancic is well managed by a dynamic membership. Faust Vrancic is one of the few local Croation NGOs to have a yearly audit of their books. They also have very clear ideas about the need for community development and where they want to go. Although the Faust Vrancic organisation does not currently have funds to contribute for credit, they are willing to conduct fund raising if the credit program starts to help find matching funds in years two and three.
The mission was impressed with the dynamism of members of this NGO. Faust Vrancic also receives high notes from UNHCR with which they have collaborated since January 1996 on two projects. Members of this association have excellent contacts in the communities of displaced people and in the rural areas. They are interested in expanding into the area of credit. Although this NGO has primarily been active in humanitarian activities, they focus heavily on process and could provide invaluable assistance in the development of community associations which could in turn evolve into micro finance institutions.
b. Caritas
CARITAS is the primary international NGO working in the Šibenik area. CARITAS is operating a credit program for micro and SMEs both in the project area and throughout the country including Western Slovonia for detailed programme information including loan criteria and conditions and CARITAS agreement with Zagrebacka Banka). The project is funded by CARITAS Germany and the German government. Phase I of this project started in November 1995 and covered the areas of Western Slavonia, Zadar region and hinterland, Sibinik region and hinterland and two municipalities (Hrvace and Vrlika) in the Split region In the second phase of the programme ,which started in the fall of 1996, credit was extended to Eastern Slavonia, Banovina and Lika. The budget for this program is :
Year I guarantee fund amount................$ 303,000
Year I additional guarantee fund amount.$ 182,000
Technical Assistance Budget..................$ 97,000
The technical assistance budget is for a period of two years. It covers the salaries of a project manager and four coordinators, some additional technical assistance from Zagreb and travel and operating costs.
The CARITAS program which started in 1995 is based upon a guarantee fund operated in conjunction with the Zagrebacka Banka. Their program which operates throughout the country negotiated an arrangement with the bank whereby the bank allows for a multiplier effect of four (credits can be made for up to four times the guaranty amount). The guaranty fund, started with US$ 303,000 is in a term account earning 8%-10 % interest. CARITAS through their regional coordinator is responsible for conducting site visits to explain credit conditions and to evaluate the character of the potential borrower. If the client meets CARITAS criteria, the loan application is forwarded to the bank. The bank in turns checks whether the client is overdraw at another bank or has credits elsewhere. If the bank vetting is successful then the client is invited to the bank to sign a credit contract. Follow up visits are then conducted by the CARITAS regional coordinator.
The Sibinik regional coordinator Mr. Bozo Pudic, has a very good grasp of micro and SME finance methodology and an excellent grasp of how to explain credit terms and conditions to clients. Mr Pudic's educational background is in economics. He is also assisted by volunteers. Total annual regional program operating costs are $ 10,300. This includes both the coordinator's salary ($425/month) and administrative/ travel costs.
To date CARITAS has made $ 364,000 in loans to 37 clients in the Šibenik hinterland. These loans were for agricultural production, life stock production and for SMEs. The average credit size is $ 9,838. The minimum loan amount is $ 3,030 and the maximum $ 12,120. The interest rate charged by the bank is 14% + 1% commission fee. Repayment amounts are tied to the Deutsche Mark. Repayment periods are generally five years with a six month to one year grace period. Currently, repayments are on time. CARITAS estimates that they may eventually have problems with one of two of the loans.
Some Economic activities financed by the program include animal production (sheep and cows), carpentry and aluminum framing, plastic wire production, agricultural bottling and shell fish production. The general conditions are that the activity must me productive and should provide additional employment, and the client must be of good character. CARITAS is very serious in evaluating the client's character, insuring the feasibility of the economic activity about guaranties and insuring that the clients take their repayment seriously. Private clients must provide two guarantors earning salaries which are being paid into bank accounts. In the case of legally registered businesses, they are required to sign a blank Bill of Exchange which can be used in the case of none payment. Legal entities must also have an account with the Croatian Payments Transfer Agency. The function of this agency is to act as a warehouse for all internal financial transactions.
CARITAS has developed a methodology (including simple documentation). CARITAS has a comparative advantage in that they have an in-depth knowledge of people in all the different municipalities. Their program was visited by staff from the National Guaranty agency. Staff was so impressed by the program that they agreed to pay back 10% of each loan value. The Šibenik Chamber of Commerce is also very impressed with the program and feels that procedurally it is much more straight forward then current banking procedures.
CARITAS recommended going through a local bank for this type of program. The two main reasons where that decision making is much quicker since it can be made at the local level instead of in Zagreb secondly, they felt that this tends to keep the program moneys in the area.
The regional CARITAS staff is very willing to assist and benefit from the programme. Since they have currently used all their credit funds they are very interested in additional funds which would allow them to extend operations. They are also very interested in the idea of a mutual guarantee fund which would keep funds in the region.
The President of CARITAS Croatia priest Josip Grosic, the Chairman Monsigneur Velimir Stankovic and the project manager Ivan Fures (CARITAS ZAGREB, Kaptol 26, 10000 Zagreb, Croatia , Tel: (385) 1 4551 022, FAX (385) 1 4554 957) have all been briefed on the project and are interested. CARITAS was also invited by Euro-In Consulting to a presentation of the mutual garantee concept and Euro-In Consulting technical assistance programme in Croatia.
Changes to the existing CARITAS programme would require them to go back to their donor. It would also require a vote by the Croatian governing body of CARITAS Croatia. They are willing to do this although they suggested that the development of a separate project could also be an option. In addition to discussions, CARITAS National staff has also been asked a number of questions in writing concerning interest in assistance in developing a business plan, potential coverage of operating costs by the project and potential collaboration with Euro-In Consulting. This needs to be followed up by Mr. Van Dam the project director in the immediate future. Contact should be made through Ms. Zaklina Marta Bogdanic of CRS (10000 Zagreb, Gotovceva 1, Tel: (385) 1 4553-169, FAX (385) 1 4553-119).
Conclusions
The war and changing economic structure of the area have heightened the rural exodus from the area. This is particularly true of young people. According to the RDP survey 23% of the displaced people were over 60 years in age. Before the war 34,000 lived in the area at the present time, 11,000 or 30 percent of displaced people have returned to the rural areas. Even if 60 percent eventually return to the areas it is not clear that the area will ever attain its former population density in the hinterland. This means that the regions carrying capacity for micro and SME is greatly diminished.
The dramatic drop in wage employment in factories (more than 10,000 jobs in Šibenik alone) mean, that for many families in the Šibenik hinterland, the model of complementing wage earnings with mainly agricultural production has changed for the foreseeable future. Although there is certainly a place for micro finance in the area, in the short term people need to concentrate on economic activities which will cover the majority of their revenue needs either in agriculture or in small businesses.
In the short and in the medium term, Croatian banks operating in the area will not be making micro enterprise loans. Banks willingness to make SME loans is also very limited. Without a loan guaranty program or heavy guarantees (including mortgages) banks will not be providing any significant amount of small enterprise loans to agriculture or small business. Following our discussions with commercial banks both in Zagreb and in Šibenik, we find it unlikely that banks will be willing to lend to the vast majority of these clients without a permanent guaranty which most will not be able to provide. Those farmers who manage to reorganize themselves into viable marketing cooperatives may be able to provide tangible assets (infrastructure or contracts) to be used as guaranties, for the vast majority this will not be possible.
Two main options exist. One is to develop the framework for a permanent mutual guaranty fund. The advantage of such a system is that it could provide long term access to bank credits for members. This is a system which has been used with a lot of success in Italy and a number of other countries. The disadvantage of such a system is that it requires strong management skills, and may be susceptible to political pressures because credit guaranty decision are made centrally. Another option is to create a credit organization ŕ la Grameen bank or credit union. Advantages of the later models are that they allow members to mobilize their own savings and therefore dramatically increase the individual's stake in credit operations. Secondly, the later models allow guaranty decisions to be made at the small group or individual level making it much less susceptible to outside political or patronage issues.
In both models the project should avoid financing production agriculture (vegetables, field crops and perennials). With the exception of perennials all other production is primarily for family consumption. This makes it difficult for beneficiaries to pay back loans. Secondly, rain-fed agriculture is risky and increases the possibility that farmers will not be able to pay back their loans. An added disadvantage of the perennials is the time needed before they enter into production. This ties up credit funds for extended periods of time during which they are not accessible to other beneficiaries.
Concerning perennial crops, The project should work with the local processing companies to assist farmers in accessing production credits which could be linked to their delivery contracts with the processing companies. The Šibenik Chamber of Commerce, the Jadranska Banka and the Croatia Banka could assist the project in making these contacts.
In the area of subsistence agricultural production, the project should work on a grant basis similar to the UNHCR's Quick Impact projects (QIPs). This should be done outside the context of the credit programs. The project should negotiate with UNHCR to provide addition funding for this activity. This could involve US $ 500,000 in year one and a similar amount in year two
While there is an interest in developing local credit institutions, with the exceptions of Faust Vrancic & LDCs there is a dramatic lack of local associations or structures and know how to undertake creation of local credit institutions in a Grameen bank or credit union model. The LDC's themselves need training and technical assistance to become catalyzers of change in the area and promoters of indigenous associations. The LDCs should be including in a credit program to gain experience but are not capable, at the current time, of operating their own credit program.
CARITAS is the only organization working in the area with a successful credit program for micro & SME credit. CARITAS has the necessary structures and knowledge of people in the target community to be immediately effective. CARITAS is also willing to collaborate with the project. The guaranty model which they are using is potentially a viable model to address the long term credit needs of micro and small entrepreneurs if it can be turned into a mutual guaranty fund. Euro-In consulting has the necessary technical expertise to assist both CARITAS, and other local institutions to create mutual guaranty programs which can be effective after the current project ends. The limited project resources of the project make this option very attractive.
Faust Vrancic, lacks experience in the area of micro enterprise finance, but has considerable experience in community development, an in-depth knowledge of communities in the project area, experience in operating one of the few successful local NGOs with ongoing project activities and experience in successfully obtained funds of over $1 M from a variety if sources both local and international.
Of banks operating in the area, the Jadranska Banka is the best suited bank to provide banking services to a guaranty program. Credit decisions can be made at the local level and staff senior staff members have an in-depth knowledge of the area. (Return to top.)
| CERANEO | Centar za Razvih NeprofitnifiI Organzija (Center for Development of Non-profit Organizations) |
| CRS | Catholic Relief Services |
| EIZ | Economic Institite Zagrab |
| IRC | International Rescue Committee |
| LDC | Local Development Councils |
| NGO | Non Governmental Organization |
| NOA | Novcarska Osjecka Agencija (Osijek Money Shop) |
| PROFOSA | Professional Women's Association, Zagreb |
| PSDP | Provate Sector Development Programme (UNDP/New York) |
| QUIPS | Quick Impact Projects |
| RDP | Rural Development Programme |
| SME | Small and Medium Enterprises |
| UNDP | United Nations Development Programme |
| UNCHR | United Nations High Commissioner for Refugees |
| USAID | United States Agency for International Development |
Bandalovi , Anika — Jadranska Banka, Šibenik
Benderly, Jill — Co-Director, Delphi International, Star Project
Be Ovan, Gojko — President Ceraneo
Bogdanic, Jacqueline Marta — Catholic Relief Services Ptrt Project Manager
Bo O P Di — Regional Coordinator Caritas Credit Programme
Bullard, John J. — Assistant Chief Of Mission For Programme Unhcr
Cari , Dr. Aleksandra — Chief Administrative Officer, International Rescue Committee
Carlson, Christina — Programme Consultant, Division I Regional Bureau For Europe And The Cis (Rbec)
Collins, Liam — Country Director Opportunity International
Comizzou, Sergio — Euro-In Consulting International Network
Conlin, Sean — Human And Social Development, European Commission, Direction Viii
Cradall, Bud — Assistant Country Director Care (Croatia/Bosnia & Hercegovinia
Drniš, Ldc — 6 Members
Galli, Paolo — Programme Management Officer Division I Regional Bureau For Europe And The Cis (Rbec)
Gibson, Susan — Microstart Programme Manager, UNDP
Hall, Iain — Programme Officer Ocm Zagreb, Unhcr
Hamilton, Shirley — Mei Program Coordinator, International Rescue Committee
Ivan I , Ana — Senior Vice President, International Sector Hbor Croatian Bank For Reconstruction & Development
Jackelen, Henry — Manager Private Sector Development, Undp/Ny
Ju I Miljenko — Assistant Caritas Šibenik
Kardum Eljko — Director Jadranska Banka, Šibenik
Kissinger, E.E. (Skip) — United States Agency For International Development
Kostani , Eljana — Faust Vran I
Labura Josip — Senior Associate, Croation Chamber Of Commerce, County Chamber Of Šibenik
Lazarevi Milan — Administration/Logistics Undp Liaison Office In Croatia
Lazarte Hoyle, Alfredo — Ilo\Ress Technical Advisor
Marusic, Filip — Representative Undp Liaison Office In Croatia
Mihaljevi , Miles — Executive Officer For Commercial Credit Croatia Bank
Nušinovi , Dr. Mustafa — Senior Research Fellow, Economic Institute Zagreb
Oklaj, Ldc — 8 Members
Ruzi , Ldc — 10 Members
R Ehak, Tanja — Administrative Assistant, Undp Liaison Office In Croatia
Sen Ar, Nada — Assistant Director, Croatian Chamber Of Commerce
Šinko, Ivo — Jadranska Banka, Šibenik
Širini , Nikola — Mayor Skradin
Škarica, Dra En — Faust Vran I
Skradin, Ldc — 12 Members
Skrbic, Natassa — International Rescue Committee
Skrbic, Tanja — Board Member Noa
Sonesson, Casper — Programme Consultant, Sme, Private Sector Development Programme/Undp/Ny
Štic Mladen — Deputy To The Chief Executive Officer Retail Banking, Privredna Banka Zagreb
Šunde Irena — Programme Officer, Undp Liaison Office In Croatia
Šupe, Joško — Branch Manager Šibenik, Zagreba Ka Banka/Pomorska Banka Split
Tarle Niko — Branch Manager Šibenik, Croatia Banka
Teodorovi , Dr. Ivan — Senior Research Fellow Economic Institute Zagreb
Unesi , Ldc — 8 Members
Usuelli, Christiana — Euro-In Consulting International Network
Van Dam, Denis — Unops Project Coordinator Cro/96/002
Vedriš, Vlatka — Lawyer
Yates, Tom — Senior Humanitarian Affairs Advisor, United States Agency For International Development
Vukovic, Sonja — International Rescue Committee
Zaninovi Vlasta — Croatian Chamber Of Commerce, Department For Relations With Banks, Agencies & Funds
