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Having been isolated from the world and the global economic trends for the last 25

years, Serbia has missed a lot of innovation and new economic development
experiences. One of them is the microfinance, the activity that came into being
about fifty years ago, and which has spread globally as "world process".
Microfinance is based on a new approach to development problems, direct targeting
of poor individuals - entrepreneurs and micro-enterprises and their economic
activation with the aim of initiating and sustaining their economic activity with the
help of micro-credit so that they cease to be a social problem of the country and
become self-sustaining economic entities.
Why should microfinance be important for Serbia, a country with a record number of
unemployed? Basically, the main source for creating employment opportunities is
economic development, i.e. the creation of such economic environment which
enables new and sustainable development. According to modern conceptions, the
universal recipes for economic development are no longer recognized, but it is now
believed that the choice of ways i.e. of economic development strategy, depends on
the specificities of each country, and that the chosen model must be adapted i.e.
specific to each particular country and its conditions (Provided, of course, that there
is the political elite capable to understand this). And Serbia, with a great
unemployment rate is desperate to try out microfinance.
When the state does not recognize or deal with the problem of economic
development, it cannot see that microfinance is one of the alternative ways to
create jobs and generate household incomes. Due to the fact that there is the lack
of interest on the part of the Serbian state and all its governments for the real social
problems (except at the level of demagoguery), the states acts and both acting and
not acting has in fact banned microfinance. Justifying itself by using the absurd
argument that microcredits would be out of monetary control because they do not
go exclusively through controlled banks, so they could cause excessive creation of
money supply or inflation. All this is said despite the fact that the whole world
allows microfinance, and despite the elementary fact that microcredits have very
limited amounts and make up only a minor part of the money supply. Nondevelopment and stagnation which have been present for decades in Serbia, along
with the continuous rise in unemployment and systematic pauperization of the
population require that microfinance be put into practice as an attempt to improve
the welfare of the marginalized people.
The first microcredits for the poor unsystematically started appearing between the
fifties and the seventies of the twentieth century, and were given mostly to small
farmers. During the eighties, the focus of microcredit enterprise was the financing of
poor women and groups of poor entrepreneurs, especially in developing countries.
These experiments eventually led to the creation of microfinance institutions
specializing in serving the poor sections of society. The name microfinance
institutions derives from the fact that their transactions are small (loans of USD
100 and above, and savings deposits of USD 10 and more), but these are at the

same time safe and reliable providers of financial services to the poor. Initially,
microfinance institutions were providing very standardized forms of loan. However,
their offerings increasingly diversified and there was an increasing number of
financial microproducts on the market. Also, there are more types and legal forms of
microfinance institutions - they exist in the form of NGOs, credit unions, nonbanking financial intermediaries and as commercial banks. Their success proved
that the poor people can be good clients, and that the banking profit can be realized
by doing business with them. Their most important role is that they enable the poor
families to create their own economic base and means and thus reduce their social
and economic dependency and uncertainty. At the macro level, microfinance
institutions expand the limits of the financial sector of each country to the social
groups that are outside and create conditions for a more comprehensive economic
development and improvement of the social status of marginalized groups.
It is interesting that micro lending coincided with the rise of neo-liberal ideas in the
US and the UK (Reagan, Thatcher). The transition of financial institutions in this
period to the strategy for achieving enormous profits left marginalized groups of
people without financial services as banks completely ignored the small and micro
businesses looking for wealthy clientele and large businesses. Entering this empty
space, the NGOs helped to finance the poor and vulnerable, to improve the social
situation by replacing the financial sector, and particularly by replacing the
indifferent state.
The main reason why Serbia does not have a developed system of microfinance is
the explicit prohibition of the NBY (the National Bank of Yugoslavia) later NBS (the
National Bank of Serbia), and its refusal to deal with this problem. At the time of
democratic changes, the Vice Governor of the NB stated in a public announcement
that the time NB has at its disposal for the re-structuring of banks is not sufficient to
deal with the problems of microfinance and the solutions which would enable
microfinance. All the subsequent teams in charge of the banking sector, all of which
were control-loving, have maintained the same principle of unilateral bureaucratic
banking: loans may be given only by banks controlled by the NB. Social problems
and unemployment are neither in their jurisdiction nor are they their interest. NBS
does not see or know that the banks needed competition and that it is desirable to
introduce savings and credit cooperatives, ethical banks, microfinance institutions,
funds, seed capital, venture capital funds, mixed funds and other guarantee, debt
financing, etc. into the system .
What are the key components of microfinance?
There is no universal definition. One of the possible ones is: "Microfinance is a
sustainable system of financial services to poor people, who do not have access to
commercial financial services." Or simply: "Microfinance is banking for the poor."

The subject of microfinance is an individual or a micro entrepreneur with up to five

employees who operates in the informal sector and is usually the only source of
household income (newsagents, a tailor's workshop, breading poultry ...). Specific
lending has been developed to overcome the basic problem of poor entrepreneurs
the inability to guarantee the repayment of the credit. They are often approved
without collateral to an individual or a group. For an individual a "collateral" is a real
project idea, and a group collateral is for all the group members to guarantee for
each member of the group.
Micro-financial institutions may be: non-profit organizations, savings and credit
unions and commercial banks. The first generation of MFI were non-governmental
institutions in the period from 1970s to 2000 and they provided only the
microcredit. Over time, they began offering other financial services and microcredit
has evolved into microfinance. It is interesting that since the beginning of this
century, commercial banks are showing an increasing interest in microfinance and
are included in the process. Here are some of the best known ones: Deutsche Bank,
Commerzbank, Citigroup, ABN and AMRO.
The success and the rapid expansion of microfinance and the especially innovative
methods of finding poor clients and insurance-specific financial services has set the
basic principles of microfinance. Those are:
1. Microfinance must meet the needs and preferences of the client (contrary to the
practice of banks where the client has to adapt to the banks demands). In other
words, the purpose, the amount of the loan, the repayment terms and conditions
have to be tailored in accordance with the possibilities and capacities of the client.
2. Microfinance has the purpose of increasing the income of the client and his
income capabilities and this is the basic criterion for granting loans, and not the
profit of the financiers.
3. Microfinance institutions must be sustainable so that the system can function and
include as many clients.
4. Interest rates must ensure the sustainability of the institution, but the decision on
the loan must be based on the assessment of the sustainability of the project being
5. The role of the government or the state is to create conditions for the
development of microfinance by improving the business environment for small and
micro entrepreneurs, by improving the infrastructure and the like, and not to be the
subject of direct financing, since it will disrupt these small markets, like an elephant
in a china shop.

6. Donor subsidies which are used to form microloan funds should be

complementary to the private commercial financing, and should not be seen as
7. Microfinance is a specific activity that combines banking and welfare, so the
constant to increase of their own capacities is an essential principle.
8. Transparency of operations of microfinance institutions is an essential feature of
the system, because without information available on both sides, this system
cannot work (dissemination of information to the poor clients, as well as monitoring
and the assessment of the project progress).
The empirical data show that the biggest beneficiaries of microcredits in the world
are: first the women who lead the households, then the pensioners, displaced
persons, laid-off workers, small farmers and micro-entrepreneurs.
Characteristics of microfinance are:
1. No collateral.
2. Simple procedure.
3. Quick financial services on the doorstep.
4. Mobile branches of microfinance institutions in rural and marginal areas.
5. Low amounts of loans and savings (NGOs and credit unions with the average of
USD 1,213 and USD 2,500 for the banks in 2006).
6. Short credit terms.
7. Completely diversified purposes.
8. The free choice of entrepreneurial activity of the client.
9. Focus on vulnerable sections of the population.
10. Women are privileged clients, because they are empirically proven to be more
successful than men.
11. The system of microfinance always includes non-financial services, as well, i.e.
trainings for the recipients of microfinance.
12. The rule is to always approve a new loan to each client who regularly repays the
13. The impact of microfinance institutions themselves that are spreading and
creating great new employment opportunities is not negligible.

14. It takes time, the right resources and a real commitment for microfinance
activity to be raised to a level that would have a positive impact on the expansion of
employment in the local area.
What to do in Serbia, where the position of each government has remained long
term constant?
The only way I see is to prepare a proposal for a legal text with a strong rationale
that would abolish the barriers to microfinance. Since the reasons for the
introduction of microcredits are strong, it is possible that this government, which is
not familiar with the problem, could realize that it could benefit from the
introduction of microfinance institutions, since people who have jobs will not be
protesting on the streets.
What can microfinance actually do?
Microfinance plays an important role in enhancing the safety and increasing the
consumption of marginal groups. The owners of microcredit learn by working and
thus enhance their position and potential. However, it would be completely wrong to
understand microfinance as a major lever to combat unemployment and poverty.
Nothing can replace development programs, so the focus of the policy must be the
promotion of economic growth which is the only one that could create conditions for
greater employment. This is because credit is only one factor in the process of
generating income or production. Precisely that is why, in a long time thats ahead
until the launch of economic growth, microfinance can be useful and help the
disadvantaged households.