The Informalisation of the BiH Economy and the Role of the Microfinance Model

This paper begins with providing a background to the situation in Bosnia-Herzegovina (BiH), elaborating on the worker self management system prior to 1989, and the post conflict microfinance based development approach following the peace agreement in late 1996. The paper suggests that microfinance based development model led to an informal trade based economy rather than a production based one in the country.It critically examines the following three assumptions used to justify the microfinance model in BiH:

• MFIs are eventually going to be financially self-sustaining, so the local enterprise sector and the local economy in BiH must benefit from their continuing ability to provide microfinance to any enterprise that wants to use it;
• The rapid expansion of the microenterprise sector in Poland worked very well, so it should also work well in BiH;
• The new impact evaluation methodologies prove that microfinance has been a net positive benefit in BiH.

Further, the paper presents the following key problematic issues with the microfinance model in BiH:

• Deindustrialization and infantilization of BiH economy;
• Creation of an atomized 'unconnectable' local enterprise sector;
• Planned failure to reach minimum efficient scale of operations;
• Facilitation of trade deficits and import dependency;
• Destruction of the local social capital.

The paper concludes that though microfinance interventions produce a number of short-term benefits, yet they may undermine sustainable economic and social development in the longer run. The long-term development contribution of microfinance, in case of BiH, needs more research and analysis.