Microcredit finds its European niche

Today, the small storefront salon is bright and clean, with a laminated sheet above the sink listing haircuts for 200 dinar (about $3). Pride of place goes to two new $400 barber chairs and a matching high chair with a miniature steering wheel attached for squirmy little boys, the result of her latest, and largest, loan.

"Painting and putting in new chairs made a difference," Andric says. "It's very important for customers to see the place is different. New customers, especially younger ones, are always looking at where they're going."

Yet even as large commercial banks and investment funds announce ambitious plans to enter the microfinance market, the challenges facing banks focused on the "bottom of the pyramid" remain formidable.

A $12,500 microloan may be peanuts to most commercial banks, but Ms. Zakanji says it takes almost as much time to analyze as a loan 10 times the size. And, despite interest rates approaching 30 percent at many microfinance banks, it's much harder to make a profit on lots of small loans than a few big ones. "That's why bigger banks usually don't succeed in the sector," said Zakanji. "Because of the specifics of our system, we're built to support this type of loan."

Since most clients are self-employed with little or no collateral to offer, the bank takes a holistic approach to credit-worthiness. They won't fund start-ups – businesses must be at least three months old, showing that clients have something invested. Loan officers are used to looking at whatever financial information they can find.

"We look at the cash from that day, their tools and equipment, if the building is rented or owned," says loan officer Tamara Cvijetic. "We're trying to find out how much they earn in a month, and what's the possibility they'll pay back the loan."

Loan applications can be rejected for financial reasons, of course, but loan officers also place great stock in personal impressions. Applications can be rejected for bad personal behavior or family problems.

"They look at the entire picture," Zakanji says. "This is not a corporation – this small company has an owner, and the owner is the main driving force and main employee of the business. We have to assess their potential to work and make payments in the long run."

Andric just applied for another loan, her fifth, to install a new heater and replace the salon's drafty windows. She also plans to install a TV to show different haircut options, and perhaps a new shampoo area. "I'm not nervous about the loans," she says. "I just can't wait to change things."

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