micro-lending in bulgaria – who will fill the gap and how?

MICRO-LENDING IN BULGARIA – WHO WILL FILL THE GAP AND HOW?

by Andrey Ivanov1

1. Introduction 2

For many years, SMEs have been seen as the most promising engine of growth inBulgaria. One of the key issues in this respect remains the problem of access to capitalfor smaller micro-enterprises, especially those in the start-up phase (see, for example,OECD, 1996). Different programs are targeted at this informal segment of the businesscommunity, but they often miss their intended target. As a result people either capitalizetheir family resources or, using inter-personal contacts, come to rely on the informalsector itself as a source of capital. Solving the issue of micro-lending is becoming muchmore important than a few years ago. Structural reforms to the large industrialenterprise sector are now gaining pace in Bulgaria, but with it also the increasingincidence of structural unemployment. Given the enormous transition problems whichhave affected Bulgaria to date, and the rising incidence of poverty and social exclusion(particularly in the rural areas), a much larger population of the unemployed will beextremely unsettling for the country. The crucial economic, political and social issuefacing Bulgaria is now, How to absorb these newly unemployed?

2. Why micro-loans are necessary?

Micro, small and medium businesses have a definite role to play in employmentcreation.3 There is enough evidence to show that significant growth of employmentreally comes from bottom-up growth of micro and small enterprises (see data in table 1presenting the dynamics of employment in the last years by company range). In fact, tothe extent that it is easier for smaller enterprises to use unregistered labour contractsthan it is for larger companies, the statistics probably significantly under-represent theamount of job creation in the small enterprise sector. The data indicates that thesesmaller companies have the biggest potential for employment absorption. The drasticreduction of total employment in 1997-98 affected also the small and mediumcompanies, which (for the first times in the last few years) have also reported areduction in employment, at least in the officially reported figures. Large enterprises,on the other hand, continue to shed labour. It is mainly explained by the high previouslevels of hidden unemployment in large companies, a problem which must now beaddressed if the enterprise is to have any chance of survival. The overall balance is aloss of 9,100 jobs in 1996, nearly 121,000 jobs in 1997 and almost half a million in1998 in large businesses.

MOCT-MOST 2: 229-243, 2000.© 2000 Kluwer Academic Publishers. Printed in The Netherlands.

Closer inspection of the data shows that part of the reduced level of employmentrepresents an increased outflow into retirement, while some people have gone intosmall-scale agribusiness and so do not need to register because of this. The rest of thosedismissed by the large enterprise sector have only two realistic options. The first optionis rely on the State’s safety nets and to register as unemployed. The second option is touse one’s own initiative and attempt to ensure individual survival through self-employment or by being employed in a micro-business. These micro-businesses maygrow into larger ones in the future, or they may not: but, in any case, it is consideredpreferable to have people employed or self-employed (even if in the shadow economy),than to have them survive on an incomplete and under-funded social safety net andeffectively consigned to the margins of society. More positively, employment within themicro-enterprise sector is, for some at least, the first step towards integration into theformal sector.4 For a start, working in the informal economy allows for businessconnections to be established and maintained. The process of capital accumulation alsostarts within the micro-enterprise sector. In addition, skills, experiences andunderstanding are increased through informal sector work, and this will naturally be avaluable asset once a formal sector business is registered (see, for example, FED,1998a; 1998b).

However, micro-businesses are often dependent on micro-lending, and so access tomicro-loans is therefore an important parameter in terms of facilitating a reduction inthe level of structural unemployment. In the long term, the only feasible way to reducethe high level of unemployment is through self-employment. This conclusion has directpolicy implications. First, in order to reduce the high level of unemployment, thegovernment is becoming more and more interested in self-employment in thecommunity of the unemployed. Second, in choosing between two objectives – reducingthe shadow economy and reducing unemployment – the latter should be a priority.Third, if self-employment is expected to be the main unemployment reducer, access tomicro-loans (and not small or medium loans) should be a priority.

230 Moct-Most, No.2, 2000

Table 1: EMPLOYMENT BY SIZE OF ENTERPRISE (PRIVATE AND PUBLIC)

Change in employment by size of enterprises (total public and private)

Company range 1995 1996 Change Change Change

1995-96 1997 1996-97 1998 1997-98

Micro 264562 254859 –9703 279701 24842 344685 64984

Small 266576 286809 20233 299377 12568 243927 –55450

Medium 260724 268127 7403 270704 2577 152920 –117784

Big (over 100) 1568822 1559722 –9100 1438867 –120855 943951 –494916

Total employees 2360684 2369517 8833 2288649 –80868 1685483 –603166

Source: own calculations based on data from NSI, IME and NASME

3. The response of the government and the donor community

Although reasonable from an economic and political point of view, the government’sattitude towards micro-enterprises is less than wholly supportive. The government tendsto approach the problem of unemployment via large-scale job creation, rather thanthrough the promotion of self-employment. The government’s program “Bulgaria2001” sets the target of 250, 000 new jobs to be created in one year of which 60,000 areplanned to be established within state-funded (or rather debt-funded) infrastructureprojects.5 This emphasis accounts for why micro-loans are not a priority. The rhetoric of“SME support” is targeted towards the support of existing small and mediumcompanies thought capable of growing and creating additional employment. For thisreason most small businesses fall outside of the existing systems for access to businesscredit provided by the banking system. There are several credit lines active in thecountry especially designed for supporting SMEs, but they are targeted at small andmedium sized loans, rather than micro loans. Start-ups are definitely not supported.

One of the first credit lines established was with international donor communitysupport. This was the Phare SME credit line provided under the 1992 Memorandumbetween the EU, and the Ministry of Industry and Bulgarian National Bank (BNB).Under this agreement a 7 MECU component of a 22.5 MECU program signed in 1992was earmarked for an SME credit line to be channelled through the commercial banks.After virtually no movement in the SME credit line, the project had to be included in thenext Memorandum of Understanding (mow) between the Bulgarian government andPhare which was signed on October 30th 1995. This again made available a total of 7MECU for lending to SMEs. The implementation authority was to be the Ministry ofIndustry. A further 1 MECU was allocated for TA to the project. This credit line wassupposed to provide access to credit for small business investment projects which areexport-oriented, create new jobs and are oriented towards production, transportationand tourism services or for the processing of agricultural products. Under this schemethe BNB acted as the APEX institution and the credit line was implemented throughthree commercial banks (Post Bank, Central Cooperative Bank and Express Bank). TheApex institution, the BNB, received the first 4 MECU tranche of funds by the end of1995. The loans were supposed to be up to 100,000 EURO. Until the end of 1999 thetotal amount of credit disbursed was 2.2 mil. EURO, with the rest of the money stillavailable. There are many reasons why the project was not a “definite success”6 but oneof the crucial factors seems to have been the fact that there were many other far moreprofitable and less risky business opportunities emerging elsewhere in the economy,such as dealing in forex, treasury bonds and privatisation certificates. At the same time,it is estimated that Bulgarian commercial banks have over one billion USD deposited inforeign banks or invested in securities outside the country seeking secure althoughmodest revenues. This is probably the best evidence that the real problem with microand small business crediting in Bulgaria is not a lack of resources.

The second big project targeted at SME lending was the KfW – Micro and Small

Andrey Ivanov, Micro-Lending in Bulgaria 231

Enterprises Lending Program. Under this program a credit line facility of 8.5 mil. DEM(plus 1.5 mil. DEM for project implementation costs such as training of creditdepartment staff of intermediary banks) was made available for financing Bulgarianmicro and small enterprises. In consultation with KfW, the Ministry of Finance and theBulgarian National Bank, two banks (State Savings Bank and Eurobank) were selectedas partner banks to implement the project and deal with the target group. The partnerbanks received refinancing resources and technical assistance from the Germanconsulting company IPC GmbH. In order to be eligible the target clients under thisprogram had to be officially registered as private micro or small enterprises employingup to 50 employees and operating in the small production, trade and services sectors(i.e. the idea was to promote production and services rather than trade operations). Themaximum loan size was 50,000 DEM with up to 2 years loan term and interest ratewithin 12-18% (dependent on the loan denomination, term, the financial standing of theborrower etc.). By the end of 1999, a total of 130 projects had been financed, with thetotal amount of credit disbursed reaching 2.5 mil. DEM. This makes the average loansize slightly over 19,000 DEM (i.e. closer to the requirements for a small loan than thePHARE SMEs lending facility). At the end of November 1999, after the successfulexperience of the program in Sofia, Plovdiv was included in the scheme as well. Bymid-2000 Burgas and Varna are expected to be included.

The third, and widely publicized, endeavour is the government-sponsored PromotionalBank, which was established under an ordinance of the Council of Ministers on 13October 1998 and has been operating since 25 February 1999. It was expected to createthe missing motivation mechanism for micro and small enterprises to gain access tocredit. The Bank’s capital is 11.61 mil. new Bulgarian Leva (BGN) with the state(represented by the Ministry of Finance) as the main share-holder. By the end of 1999the Promotional Bank had been able to allocate 4 investment loans to a total value of580,000 BGN which gives 145,000 BGN (or around $70,000 USD) as the average loansize. The fifth loan (85,000 BGN) was for export crediting.

These three examples are illustrative of both the adverse situation on the Bulgarianlending market and the government’s approach to the issue of SME development as anabsorber of structural unemployment. All three projects target registered businesses andhave very little engagement with the problems of start-ups. In terms of loans sizedespite the (hopefully) sincere efforts to encourage small loans provision, the thresholdof 15,000 BGN is still a hurdle. All projects are targeting loans above this value. Theonly exception is the State Savings Bank (SSB) with its consumer lending and microbusiness lending activities. SSB is fully aware of the fact that a significant part of theconsumer loans they extend are actually investment or working capital loans. The bankeven encourages this use of its funds – the bank does not monitor what the loan is usedfor. The value of consumer loans having production purposes is assessed by theofficials of the bank to be at around 30% of the total amount of consumer loans, thoughothers consider that the figure is probably much higher than this. This gives goodgrounds to say that SSB consumer lending activities can be treated as “unofficial loans


for the informal business”. The micro business lending component is also bureaucracy-free, requiring few procedures (e.g., no detailed business plan is required, in somecircumstances personal guarantee is sufficient for loan approval). The interest rate onmicro loans is the upper limit for business loans (by 2000 – 14,5%) plus up to 2% forthe higher risk. However, in most cases SSB is also requiring guarantors on non-termlabour contracts or collateral which limits the access to capital for the “unofficial targetgroups”.

4. Why micro-lending is still scarce

There are several reasons for the lack of interest on the part of the commercial banks toengage in micro-lending. Most important is the rather obvious fact that small loans aremore expensive to manage and give lower returns to the commercial banks. Usually,also, clients have difficulties in providing collateral as a guarantee of the credit. Thatobviously has a negative effect on the credit risk taken by the lender. Smallentrepreneurs usually do not conduct strict accounting and it becomes difficult for thebanks’ credit officers to assess the creditworthiness of a potential client. Moreover,most of the micro and small entrepreneurs in Bulgaria lack experience and are notproficient in business-plans drafting. The banks have difficulty dealing with such plans,and the tendency is to “play it safe” and reject an application if there is any doubt.Another organizational reason is that most of the start-ups are not registered. Mostprefer, or are forced, to operate in the informal sector because of the high costs of entryand high tax and social security burden. Finally, there are also some psychologicalreasons for the poor supply of micro-credit related to the commercial banks’ attitudethat small businesses are seen as “lower level business”. For the Bulgarian banks“small” is definitely neither beautiful or promising because banks (and the governmentas well) are still susceptible to traditional myths entwining poverty, third worldeconomics and micro-lending (see also Petrounova, 1999).7

There is, nevertheless, a logical rationale behind the commercial banks’ unwillingnessto allocate small and micro loans in Bulgaria. There are two basic types of argument.One is the high risk in dealing with micro-enterprises and start-ups. The potential creditapplicants for micro-lending (small entrepreneurs and, especially, start-ups) are oftenlacking a proper business culture and experience, and have difficulties in assessing thereal demands of the market, the probable costs of production and the possible revenues.As a result, small businesses, and especially start-ups, have a difficult learning processto go through. But here they fall into a familiar vicious circle: loans are unobtainablewithout business experience and collateral; yet business experience can be acquiredonly through “learning in the process of doing” and this is impossible (or at least verydifficult) without proper access to credit. The option to use the informal credit market isalways there, but this is an expensive one. Most entrepreneurs simply fall back onmobilising their own resources (family or friends’ savings)8. A further argument relatesto the “bad memory” of the banking crisis in 1996, which led to a significant tighteningup of the financial system. Those commercial banks that were identified as in danger in


1996-97 are now empowered to lend only up to 50% of loan receivables. The crisis ledthe commercial banks to significantly tighten up on the risk profile of clients, with theresult that clients are now heavily collateralised, with established track records of profitand credit repayment and should be well known to the banks (i.e., again, most areexisting customers of the bank). No matter what was the reason for the conservativepolicy (it is difficult to estimate to what extent these policies were imposed by theCentral Bank and to what they were welcomed by the commercial banks unwilling tolend), the result was the reduced availability of credit for new SMEs.

However given the important role the State is still performing in the economy as a directinvestor (mainly in infrastructure projects) political reasons for the lack of capital forSMEs are significant too. The State has always been a key actor in Bulgarian economy,but it became even more important after the war in Kosovo. The negative economicimpacts, as well as the expected role of the Stability Pact in the reconstruction of theregion, meant the government had to step in to ensure that a proper co-ordinatingmechanism was there. This co-ordinating role was augmented by the invitation for EUmembership negotiations that the country received in December 1999. The State orstate-controlled agencies will have an active part in the process of project application,implementation and co-ordination related to the pre-accession and structural funds. It isalso probably the case that the state (more than two or even one year ago) feelscomfortable in the role of direct employment provider. The result is an economicenvironment which is definitely unfriendly to micro and small loans provision. Evenafter the financial crisis of 1996/97, when credit markets collapsed as a result ofhyperinflation precipitating the bankruptcy of many credit institutions and banks, thosebanks which survived remain strongly in favour of lending to large companies,preferably state-owned or where a monopoly exists.

5. The gap between micro and professional banking and who is filling it?

Another result of the problems in the financial markets in Bulgaria is the distortedcredit market. In fact, a serious gap exists in the credit market. On the one hand, thecredit market is still dominated by banks. On the other hand, they are not providingmicro loans, and not even small loans. Part of the reason lies in the cost of micro-loans,as noted above, but it is also the case that profit-seeking banks naturally channel theircapital into the most lucrative areas of business, which are generally not micro-loans (orSME loans). These new business areas include forex markets, privatisation certificates,short term hard currency accounts, off-shore high interest accounts, inter-bank lending,as well as the emerging treasury bond market (i.e. the traditional crowding outscenario). Where the banks do get involved with smaller loans, it is at the top end of themarket, rather than further down to meet the needs of micro-entrepreneurs. Table 2indicates the emerging separation between formal and bank lending.9


At the same time, in spite of the commercial banks’ lack of interest in micro-finance,micro-finance institutions are still very few in number. First of all, there are many legalobstacles to overcome, especially the provisions of the Banking Act which requires abanking licence for deposit operations and strictly restricting lending for non-licensedoperations (see also below). This is why most of the micro-finance programs are stillorganised and funded by social founders – for example, foreign donors, UN agencies,EU and international non-governmental organisations (or their Bulgarian partners). Infact micro lending is still reserved for non-banking institutions.

In Bulgaria, micro-finance programs can be divided into two groups according totheir way of implementation – some are implemented through banks and others areusing the co-operative structure. In most of the cases where banks are involved, theNGOs use them as intermediaries in order to avoid the restrictions of the Banking Act.It means that most of the existing micro-lending schemes need the banks in order tolegitimise the process of delivering the funds which are already available: they do notneed them as a source of financial resources. The most popular micro-lending schemesinvolving banking institutions are10:

1. The Open Society Foundation (OSF) small enterprise development programoperating in Smolyan. For the purpose of the program a local NGO responsible forprogram implementation was established. In fact it is doing part of the bank’s typicaljob – from program promotion and recruitment of clients to monitoring theperformance of the loan portfolio and control of payments. The local branch ofUnited Bulgarian Bank (UBB) has been chosen as a lending partner. Loans are up toUSD 2,000 for working capital purposes and up to USD 5,000 for capitalinvestments. If the client is successful in repaying the first loan the threshold for thesecond is up to USD 5,000. There is 90% guarantee on the loan capital disbursedprovided by US based party and the clients are also required to put a pledge of 100%


Table 2 : MICRO-FINANCE VERSUS FORMAL BANKING

Micro-finance Formal banking

Loan range < $ 10.000 > $ 20,000

Average loan size $ 2,500 – 3,500 $ 75,000 – 100,000

Target businesses Start ups, consolidation Expansion

Business environment Informal and subsistence sector Formal sector

Target clients Micro-entrepreneurs, Experienced entrepreneurs

Non-entrepreneurs

Security Non-collateral-based Collateral-based

Loan duration 6 – 12 months 24-48 months

Interest rates Libor + 5-10% Libor + 1-2%

of the amount required as a loan security. The interest rate is Central Bank (BNB) rateplus 8-12% (depending on the assessed risk of the applicant) with 6 month graceperiod. By mid-1999 there were 20 loans outstanding in Smolyan, with an averagevalue of USD 4,000 each. OSF has started a separate credit program implementationin the city of Sliven, where with the assistance of Raiffeisen Bank, 6 loans have beendisbursed to small and medium companies. In Sliven, the average loan size isUSD50,000 and USD 150,000 is the upper limit. Family businesses that employ lessthan 5 people are excluded from program participation. Loans are given for 3 yearswith 6 months grace period.

2. The Business Center Devin – Deposit Collateral Scheme, which is a program whichhas been designed and is being implemented by UNDP. It disburses UNDP fundingthrough the Business Support Center in the town of Devin (BC Devin) in order toassist small businesses and start-ups in the region. In addition, there is the provisionof information and consulting services and seed finance for the start-ups. TheDeposit Collateral Scheme set up with United Bulgarian Bank (UBB) supportprovides hard currency collateral for loans to small businesses. The total amount ofthe Fund is $35,000 and it is deposited in the bank account of the Devin businesscentre. For each loan disbursed, UBB freezes 105% of the loan size from that fund.The blocked part of the current account is treated as a “guarantee account”. Thebalance of the guarantee account should always be equal to 105% of the outstandingbalance of the loans guaranteed. Loan sizes are between $500 and $3,000 for the firstloan and up to $5,000 for a second. Loan terms vary from 3 to 36 months. By March2000 12 loans had been disbursed and 65 new jobs had been created. Thos eligible forthe program are companies with an annual turnover not more than USD 50000 andemploying not more than 20 employees.

3. The FAEL foundation micro-lending program started in 1995 as a project of theSwiss Agency for Development and Co-operation for small business assistance incentral Stara Planina region (Lovech, Gabrovo and Tarnovo districts). The focus ofthe program is capacity building of companies involved in food processing, timberand forestry industries with special attention on job creation, ecological standards,sustainable development and local resources utilisation. The micro-credit componentstarts in 2000 with 1 mil. Swiss Francs credit line for the first three years of operationof the project. The applicants have to provide from own sources 20% of the requestedamount of the project.

Another option for micro-loans provision is through the cooperative system. The mostsuccessful examples are11:

1 Popular banks/credit unions.

The Popular Bank/credit union movement was expected to become an important part oflocal capital disbursement in Bulgaria, though not yet local capital accumulation.


Legislation still forbids credit unions from deposit taking activities on a wide scale,although new measures were passed in the Bulgarian Parliament in December 1999which might finally allow for this. Most such institutions therefore finance theiractivities from membership fees. It has proved difficult to amend the legislation infavour of deposit-taking because of the desire to prevent financial abuse, such as thepyramid schemes which blighted the early post-Communist financial sectordevelopment in Bulgaria and elsewhere in the Balkans (e.g., in Albania and inMacedonia). The activities of the Popular banks are building upon the long history ofcredit co-operatives in pre-Communist Bulgaria, most of which were extinguished in1946 and taken over by the state. Moreover, in spite of the poverty and other difficultiescurrently being faced in the rural communities in Bulgaria, there nevertheless alwaysremains much scope for local savings mobilisation in poorer communities if the rightinstitution is involved (Robinson, 1994). Today there are several popular banks ofwhich the most successful is the Russe Popular Bank, which has successfully operatedsince 1993. Since its establishment, the total number of loans disbursed is 773 with atotal value of $4,665,142 which gives an average loan size slightly over $6,035 thoughthe average loan size for production SMEs is higher (over $28,000). As shown in table3, there is a clear tendency towards decline in loans size.

Table 3: RUSSE POPULAR BANK LENDING PERFORMANCE

Period 1993- 1997 1998 1999 January- Total 1993-

1996 March 2000 2000

Number of loans 511 28 62 121 51 773

Total value (in USD,

current BNB exchange rate) 3535098 112114 360110 507700 150120 4665142

Average size of loan 6918 4004 5808 4195 2943 6035

Source: Russe Popular Bank

Typically default rates on credits are extremely small; in fact, no more than 0.3% for themicro-credits and only a little higher for the production SME credits. This highrepayment rate is put down to the credit guarantees that must be offered by three otherpersons known to the applicant, plus the community focus of the lending. During theseven years of operation with the loans disbursed by the bank, over 280 businesses havebeen opened creating more than 1500 jobs (not including the self-employed). Theactivities of the Popular Banks however were greatly undermined by the financial sectorcrisis in 1996, and particularly the hyper-inflation, which significantly denuded theasset base of each one considerably. For example, the Russe Popular Bank saw its assetsdive from over $4 mn to just under $0.5 mn in 18 months. After the introduction ofcurrency board inflation was curbed, but the efficient demand and the opportunities forraising capital decreased as well.


2. CRS/Bulgaria Micro-finance program.

This programme started in 1998 and to date approximately 100 loans of $145,000 totalvalue have been disbursed in Vidin and Stara Zagora regions. In the program,cooperatives of approximately 12-20 persons are formed by self-selection of micro-entrepreneur clients who have existing businesses in the trade, services and smallproduction sectors. Micro-entrepreneurs must contribute 10% of the initial loan size(equivalent to $50) in order to become a member of the cooperative. They will then beeligible to access increasing amounts of non-collateralized working capital starting at$500 and capped at $2000. Potential clients are both male and female micro-entrepreneurs with existing income generating activity. Family businesses or soleproprietorships with three or less employees, including family members are eligible forparticipation.

3. Nachala Foundation/Opportunity International small enterprisedevelopment program.

Nachala Foundation has been established as a co-operative in 1993 by OpportunityInternational with the objective to implement a small enterprise development program.Nachala has also acted as an intermediary for the Bulgarian American Investment Fund(BAIF) acting as manager of a loan portfolio designated for small enterprises (evenafter BAIF was licensed as a banking institution Nachala continued to assist it in thesmall loans applicants selection process). Nachala disbursed 450 loans with total valueof $2,000,000 in the course of its first three years of operation. By the year 2000 thetotal number of disbursed loans is more than 1600 (total value – almost $5 mn. BGNand the average loan size – 3500 BGN). The sectoral distribution is as follows: almost19% for industrial production companies, 48% – companies involved in trade, 12% – inservices, 7% – agriculture and the rest – in other spheres of activity12. At this time theupper limit on loans was $20,000. The banking crisis in 1996 forced the program intoundertaking a major restructuring of the outstanding loans, impose a block on newlending, and restrict the upper limit to $3,000. Currently, Nachala targets businessesthat require $500-$3,000. The initial loan size could be $2,000. The loan term is from 3to 18 months according to the individual client requirements. Interest is set at 17%annually on any loans. For second time borrowers the interest rate may go down to 15%.Alongside a business plan, potential clients also need to submit promissory notes from5 guarantors as well. Successful candidates also need to become members of Nachalacooperative in order to receive the loan. Local Nachala staff visits perspectivecandidates to evaluate their business potential and check the information on theapplication form. Those findings are also made available to the Managing Board priorto loan application approval. As in the case of other NGOs involved in micro-lendingalso Nachala is performing many of the functions of a credit department.

There are also a number of smaller initiatives underway. Currently, it appears that co-operative-based scheme are set to receive more attention. For example, the World


Council of Credit Unions is currently implementing a project with the objective totransform the existing “mutual assistance unions” located inside most large industrialenterprises, into credit co-operatives. The project is run jointly with the trade unions(the Confederation of the Independent Syndicates) and may be successful in promotingself-employment as an alternative to unemployment.

Possibilities for non-banking systems outside the co-operatives exist as well. One is theequity investment (this approach was adopted by CARESBAC-Bulgaria AD). By andlarge these deal with small numbers of SMEs, and/or with large equity investments.However, this scheme is applicable only to the existing (and registered) businesses,which means that these programs are not really applicable to the bulk of the potentialSME sector in Bulgaria. Another non-banking system of micro-lending was tested byan NGO working with ROMA communities as an attempt to address developmentneeds of the target group. This scheme has two (partially excluding) objectives: toprovide access to development opportunities and to transform assistance into loans inorder to avoid dependency culture. The scheme introduced in 1997-2000 by IME andCEGA (Creating Effective Grassroots Alternatives) Foundation in two Plovdiv villagesin the form of a “conditional grant” within a trilateral scheme for working capital foragro-production in Roma communities. In order to go around the ban on lendingactivities for non-licensed institutions the bilateral scheme (borrower – creditor) wastransferred into a trilateral one. This meant that any foundation interested in promotingthe small and medium-size business and administering specific target funds could lenda certain amount of capital in the form of a conditional grant. The condition is that thereceiver of the money should pledge to make a donation of a definite amount to a thirdparty (the value of the pseudo-credit plus the costs of its servicing). The third party isalso a non-profit organization interested in encouraging the small and medium-sizebusiness. This is how the flow of capital will not remain restricted between the creditorand the borrower, and on the other hand the creditor (a non-profit organization thatgrants capital in the form of a donation) cannot be accused of undercover handling ofaccounts and loans. However, this scheme is difficult to establish, and it is applicableonly in cases when social objectives, such as poverty alleviation, have to be combinedwith economic growth promotion. It may be useful in regions remote from bankbranches and where access to banking (intermediary) services makes the cost oflending unreasonably high. Also, by combining objectives (social and market), thescheme should not be expected to achieve complete repayment rate.

6. Future development: outline of possible policies

Any hypotheses on the future development of micro-lending in Bulgaria should startfrom an estimation of the potential market for such services. The number of activemicro and small businesses in Bulgaria (i.e. those who have submitted annual balancesto the National Statistic Institute) was 201,137 in 199913. Of these 99% are privatelyowned and some 94% can be classified as micro-enterprises, mostly self-employed (seetable 4).


At the same time unemployment rate is constantly growing (from 12,88% in January1999 to 15,97% in December 1999). As a result, in 1999 a total of 44 of the 262Bulgarian municipalities had average registered unemployment double the countryaverage, while in 92 municipalities unemployment was between 25% and 100% higherthan the country average. At the beginning of 2000 this tendency was intensified, and inJanuary the number of registered unemployed had reached 657,095 (17,19% of theable-bodied) reaching 693,531 (18,14%) by February 200014. Most of these peoplehave their perspective limited to self-employment, which makes them potential clientsof micro-lending institutions. In this respect micro-lending in Bulgaria may witness thetendency described by Dichter (1999), i.e. the evolution from enterprise development topoverty alleviation lending.

Assuming that micro-enterprises may need loans of $500 to $3,000 for working capitalpurposes and $5,000 to $8,000 for longer-term investments, the market potential forsuch services seems significant. Harman Abels estimates it at $200 million for micro-business financing15. But this estimation may even be somewhat conservative. Theexperience of the Russe Popular Bank (one of the few willing to disclose informationon its credit portfolio) gives clear evidence in this respect. For the first three months of2000 due to the lack of capital the bank had to choose 51 clients from among 148 loanapplications (and all of the clients are willing to pay interest rates over 20% which issubstantially higher than demanded by official banking system). For a positive responseto all of applications only this institution needs between $300,000 and $400,000capitalization. The projects, which could start if the capital was in place, would createmore than 1,000 new jobs16.

So where is the problem and how could it be solved? First, it is necessary to bear inmind that lending through the banking system is a distinct sphere from micro-lending.Both institutions have different target groups. What we have now is just one side of thecoin – the official banking system lending which, by definition, is targeted at loans over


Table 4: NUMBER AND SIZE OF THE REGISTERED AND ACTIVE BUSINESSES INBULGARIA, 1998

Micro Small Medium Big companies Big companies Total

companies companies companies (101 and (over 250

250 employees) employees)

Sector Number % of Number % of Number % of Number % of Number % of Number

total total total total total

Total 190008 11129 2153 1555 798 205643

Public 637 0,3 1132 10,2 583 27,1 554 35,6 345 43,2 3251

Private 189371 99,7 9997 89,8 1570 72,9 1001 64,4 453 56,8 202392

Source: NSI

the $15,000 threshold. The problem boils down to the issue of how to complement theofficial banking system lending with a micro-lending segment. Second, such a segmentcan, and should, be market-based. Micro-enterprises and start-ups can afford higherinterest rates (as the experience of the credit cooperatives prove). In the absence ofexternal capital, it is important to capitalise the MFIs – both the existing ones and thenewly established ones. APEX schemes should be encouraged and applied for suchpurposes. Third, new services (such as leasing lending) and new quality controlstandards in the field of micro-lending should be developed and encouraged. Thisincludes credit ratings of MFIs – a practice already widely used in many countries. And,last but not least, the priorities of the state should be redefined from conservativebanking towards reasonable risk banking. This includes introducing legislationamendments explicitly allowing for the existence and operation of MFIs, plusincentives for the commercial banks to participate in the process of capitalising theirlocal MFI instead of investing abroad. For that purpose the government should probablycompensate part of the risk, treating this involvement as a long-term investment (thefinal outcome in fact will be lower unemployment, more people with entrepreneurialskills and higher economic growth). In any case the impact of such investment will bemore sustainable in terms of unemployment reduction than will job-creation throughinfrastructure projects.

The issue of clear and distinguished priorities seems to be a key one. There are enoughevidence that two or more conflicting objectives (for example unemployment reduction,poverty alleviation and private sector development) hardly go hand-in-hand in acommon program.17 Usually they require specific “division of tasks” and micro-lending perfectly fits in this division. From this point of view the creation of micro-loaninstitutions and programmes, operating within a friendly business environment,requires an overall institutional structure and strategy, broader awareness of thegovernment of the distinct priorities and the required (distinct as well) means to achievethem.

In this respect the future of micro-lending in Bulgaria seems to be rather optimistic.First, micro-lending is definitely necessary in economic and social terms. Second, ahuge potential market for micro-lending exists. Third, it may fit in the overall strategyof the government. Whether it will fit, and when, depends on an increased awarenessthat micro-lending is not a “zero-sum game”, but that it has a positive role to play inoverall economic recovery and bottom-up industrial development. It also means that therole of the government should not be direct job-creation, but probably more towardssupporting those potentially viable large enterprises around which the SME sector maydevelop as a local supplier base. Concerning the form in which micro-lending maydevelop, it seems that in short term it will remain concentrated within the “third sector”.Commercial banking will become gradually involved through the NGOs acting eitheras “credit department extensions” or as monitoring bodies. In mid-terms it seems bothpossible and desirable commercial banking sector involvement in the capitalisation ofthe efficient micro-lending schemes (as the popular banks’ one). In any case however


one of the crucial elements of micro-lending development remains the overall attitudeto it reflected in the government’s policy and priorities.

Notes1 Independent consultant, Sofia. www.abs.bg/ivanov/2 The article summarizes some of the findings within the research project funded under the

Research Support Scheme of Open Society Fund.3 For more details see Andrey Ivanov and Latchezar Bogdanov, Are Small and Medium

Enterprises in Bulgaria Employment and Growth Opportunity? IME Newsletter, Vol. 6, No 5-6,June 1999 (accessible at http://www.ime-bg.org/newslett.htm)

4 For details of the informal labor market in Bulgaria see the study conducted by the Institutefor Market Economics in 1996. It reveals that almost one third of the active labor force in thecountry is employed through the “black” (entirely hidden) or “shadow” (partly hidden)employment (and there are no signs of change in this respect in 1997). Every tenth person legallyemployed receives additional remuneration from the employer that both sides conceal. Over 23%of the employees interviewed were occupied in additional economic activity (about 10% of themhave been hired, 14% work in their own or family company, 7% - freelance activities and 8% -productive co-operatives. 13% of the uninstitutionalized employed are registered as unemployed.Most of them are hired without any written contract and for a short term (less than a month). Atthe same time 23% of the unemployed declare that they produce agricultural products forthemselves, and 3.3% of them - for themselves and the market as well. This underlines the role ofagriculture and particularly the family business for survival of a great part of the Bulgarianhousehold in the current environment once again.

5 The revisited program of the Government “Bulgaria 2001” explicitly states that in 2000 –2001 investment in the public sector will reach 4 430 mil. BGN, which will result in 60000 newjobs. The main investment priorities will be the construction of sites of the national transportationnetwork, which are integrated elements of the European route and railway corridors. By the endof April 2001 (when the next parliamentary elections are expected to take place) the total numberof new jobs should be 250000. As the program states, they will be created “through the higheractivity of the private and public sector, through the implementation of the public investmentsprogram and the regional development plans, of the special employment programs, includingmicro-projects for the creation of individual jobs and projects for SMEs development”. Theprogram is available at http://www.govrn.bg.

6 For detailed analysis of the project see An Evaluation of PHARE SMEProgrammes, Bulgaria , Final Report, September 1999, pp. 19-24 (the reportwas produced by the RDH/LDK consortium for the Evaluation Unit ofDirectorate General of the European Commission and can be accessed athttp://www.europa.eu.int/comm/scr/evaluation/reports/phare/951508_bul.pdf)

7 On the issue of myths concerning micro-lending see Jansson (1997). 8 For more details see Investment And Savings In The Bulgarian Economy: The Contribution

Of The Informal Sector at http://www.ime-bg.org/old_proj.htm9 The table as well as many insights are borrowed from Abels (1999). 10 This section summarizes information from personal interviews and data from the

following analyses: Pavel Velev, Assessment of Existing Microfinance Practices and NGOs’Capacities to Run Microfinance Schemes, Paper prepared for RIF, Sofia, August 1999; BorisLandjev, Non-banking Sources of Financing for Small and Medium-sized Enterprises, EconomicPolicy Institute Occasional Paper, vol.1, N 2, Sofia, 1999 (available at http://www.epi-bg.org);Stoyan Manolov, The Banking Sector in Bulgaria: Current situation, trends, services,opportunities for developing micro-financing organisations, Sofia, August 1999; Schemes forCrediting of Micro, Small and Medium Enterprises in Bulgaria, Economic Policy Institute, Sofia2000. For more details on the development of micro-lending in Bulgaria and the evolution ofeconomic environment see also Krassen Stanchev, Concept for Micro-lending in Bulgaria


(Survey and Recommendations), project report, Institute for Market Economics, 1997 (availableat www.ime-bg.org).

11 The experience of the Agricultural Capital Fund Scheme which is part of a large scale planimplemented by the European Union and the Ministry of Agriculture, Forestry and AgrarianReform is not analysed here although it is one of the major co-operative-based micro-lendingschemes. The reason is its specific sectoral orientation targeted at restructuring and developingprivate agricultural sector.

12 Schemes for Crediting of Micro, Small and Medium Enterprises in Bulgaria, EconomicPolicy Institute, Sofia 2000, p. 24.

13 For more details on the state of development of small and medium enterprises see NationalAgency for SMEs Annual Report, 1999 (available at www.asme.bg)

14 Source: National Employment Service monthly labor market reviews 15 , “Applying the concept of permanent servicing, that is assuming that many businesses

need permanent access to capital, and furthermore assuming that this would be the case in 50% ofall micro-business, and also assuming that at average some $ 2000 would be needed at least, arough calculation indicates a potential market of USD 200 million for micro-business financing.In reality the figure will be considerably higher because the estimate is based on the number ofexisting business in 1997. Since micro-finance can be an effective instrument for start-upfinancing, it can be safely assumed that once micro-financing supply is taken care of, it willgenerate substantial additional demand, perhaps to a similar or even larger volume. In otherwords, many people will seriously consider starting a micro-business once access to capital canbe assured” - Hermann W.M. Abels, Positioning Micro-finance in Bulgaria, PAGE 25.

16 Estimations based on analysis of the submitted business plans in the applications for newloans.

17 Impact Assessment of the Job Creation Component of the Emergency Social AssistanceProgramme (ESAP II), EC Phare Programme, December, 1998, Institute of Market Economics.

References.Abels, H. W.M. (1999) Positioning Micro-finance in Bulgaria. An Exploration to Promote the

Development of the Micro-Finance Sector in Conjunction with a Social Investment Agenda.Mimeo, Sofia,

Dichter T W (1999) NGOs in Microfinance: past, present and future, World Bank under theaegis of the Sustainable Banking with the Poor programme.

FED (Foundation for Entrepreneurship Development) (1998a) The State of Small Business inBulgaria, FED, Sofia.

FED (Foundation for Entrepreneurship Development) (1998b) Training and informationneeds of Bulgarian SMEs, FED, Sofia.

Jansson T (1997) Financial Regulation and its Significance for Microfinance in LatinAmerica and the Caribbean.

OECD (1996) Micro-credit in transitional economies, Local Economic and EmploymentDevelopment, Territorial Development Service, OECD, Paris.

Petrounova I (1999) Finance for Small Businesses – the case of Bulgaria, Agency for SMEs,Sofia.

Robinson M (1994) Savings mobilisation and micro-enterprise finance: The Indonesianexperience, in Otero M and Rhyne E (eds) The New World of Micro-enterprise finance, ITPublications, London.


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