Microcredit finds its European niche

This week, thousands of development experts will gather at the Global Microcredit Summit in Halifax, Nova Scotia, to discuss the future of microfinance. For some, the conference comes at a critical juncture for the celebrated small-loan scheme as for-profit banking moves into an area dominated by nonprofit players.

Mohammed Yunus won the Nobel Peace Prize last month along with his Bangladesh-based Grameen Bank for turning millions of "the poorest of the poor" into financial clients with loans of less than $100. While Grameen may be an inspirational starting point, some development experts say, it doesn't represent a long-term model.

In most developing countries from Bolivia to Indonesia to Serbia, massive state owned banks ignore the little guy, leaving small-scale borrowers no choice but to borrow from exploitative loan sharks. That's why microfinance's future may be here on the edge of Belgrade, rather than in Bangladesh.

When it opened its first Serbian branch in 2001, Frankfurt-based ProCredit was the first foreign bank to operate in the country, and the only bank providing services to private companies. ProCredit fills a niche for businesses that need more than a $100 loan.

Today, ProCredit Serbia issues 7,000 loans each month and has a $354 million portfolio. Eighty percent of its loans are for less than $12,500 – well under the $38,500 the European Bank for Reconstruction and Development defines as microcredit.

"Modern microfinance has been in development for the last 30 years, but the commercial aspect has just become a reality in the last decade," says Harvard Business School Prof. Michael Chu. The for-profit model gives banks like ProCredit a stable future, unlike microlending institutions that rely on donor grants, says Mr. Chu.

Profit-oriented banks like Germany's ProCredit, Boston-based Accion International, and Indonesia's Bank Rakyat are redefining what microcredit means – while also keeping an eye on the bottom line, says Chu.

"Profit is not only needed but essential," he says. "It's the only way to be sure you're attacking the center of poverty, not just nibbling at the periphery."

ProCredit's approach in Serbia has paid off, despite increasing competition from other banks entering the market. Just 0.7 percent of its loans are nonperforming, a rate that's comparable to that of Grameen Bank and still lower than that of traditional banks. Of its loans in Serbia last year, 8.5 percent were between 10,000 euros and 150,000 euros, putting it head to head with international banks like Switzerland's Raffeisen and the German Commerzbank.

For the bank's clients, the results are tangible. Hairstylist Radovinka Andric took out her first loan from the bank in 2004 to paint the walls of her men's hair salon red, yellow, and blue. Three loans later, Ms. Andric says business has continued to improve, drawing new, younger customers and holding on to regulars despite more and more salons opening in the area.

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