Bosnia and Herzegovina: MFI Performance Trends 2003 - 2005

This study discusses Bosnia and Herzegovina's rapid growth in the microfinance sector coupled with strong performance. The report examines data from 12 microfinance institutions (MFIs) over the period 2003 "? 2005 and finds that:

• The number of clients served by MFIs in Bosnia has increased by over 75% over the past three years;
• Gross loan portfolio has increased by over 80%;
• Loan balances have decreased, confirming that growth did not come at the expense of outreach;
• Costs have decreased because of operational efficiency;
• However, financial expenses have increased as the pool of donor funding has been replaced with commercial sources of financing;
• The deposit rate has also dropped, widening the gap between the cost of financing for MFIs and other deposit-taking financial institutions;
• Returns have declined for the vast majority of MFIs as margins are squeezed in the increasingly competitive environment;
• Return on equity has increased slightly due to the increasing leverage among Bosnian MFIs;
• The capital base of Bosnian MFIs has grown more quickly through retained earnings than through donations.

The report concludes that:

• The data supports the notion that scale, outreach and profitability can go together.
• The microfinance sector in Bosnia and Herzegovina provides a good illustration of some of the trends that come with increased competition "? increased efficiency, lower rates for microcredit clients, rapid growth, along with higher financial costs, increased delinquency and lower returns.