Timothy R. Lyman, Senior Legal Issues Advisor to MFC, President of the Day, Berry & Howard Foundation
Mihret Dizdar, Legal Advisor, Foundation for Sustainable Development
Bosnia & Herzegovina (B&H) - the first country in the Europe and Eurasian region to adopt specialized legislation for microlending NGOs known as "microcredit organizations" (MCOs) - is now about to see the launching of a reform initiative to affect changes to this legislation. Although some of the proposed changes are to address issues unique to B&H, many of the changes will have relevance in other countries in the region as well.
B&H consists of two constitutional entities (Entities), the Federation of Bosnia and Herzegovina (the Federation) and Republika Srpska (RS). The B&H constitution leaves to the Entities the power to adopt most kinds of economic legislation, although the constitution also contemplates a single economic zone extending throughout the territory of B&H. Accordingly, there is not one MCO Law, but two separate pieces of legislation - one adopted in the Federation in 2000 and the other adopted in RS in 2001.
The two MCO Laws are quite closely parallel, and each provides for the formation and operation of a specialized form of NGO microlender. (The NGO laws of both Entities were unreformed at the time the MCO Laws were adopted and did not offer any hospitable vehicle for carrying out microlending on a nonprofit basis.) Each of the MCO Laws recognizes MCOs created under the other law, permitting MCOs to offer their microlending products anywhere in B&H. Approximately 45 MCOs have been registered in B&H since the adoption of the first MCO Law, of which approximately 11 have been authorized to provide services in both Entities.
Besides MCOs, B&H law does not currently provide for any other form of financial institution other than licensed commercial banks. The World Bank-financed Local Initiatives Project, which spearheaded the adoption of the MCO Laws (with assistance from USAID for the initial legislative drafting) plans in its second phase work on providing legal space for additional forms of financial institution that can be used to carry out microfinance, including a commercial finance company form, possibly a form of member-owned and governed savings and credit association and eventually possibly even a specialized form of microfinance bank (if the commercial banking laws and regulations in effect don't permit such institutions to be formed conveniently as conventional commercial banks).
Although they are very similar in most substantive respects, the two MCO Laws presently also differ in a few fundamental ways. Of these, perhaps the most significant is the location and nature of governmental oversight over MCOs. The Federation law provides only for a simple register, housed within the Ministry of Social Affairs, Displaced Persons and Refugees, and there is no ongoing oversight of MCOs after their initial registration. The RS law gives regulatory responsibility to the Ministry of Finance, which also has the power under the law to adopt regulations defining maximum loan amounts and annual reporting requirements for MCOs operating in RS.
With the goal of increasing the harmony between the two laws and providing for equal treatment of MCOs regardless of where they are formed and operating, the intention is to amend the Federation MCO Law to vest the Federation Ministry of Finance with powers similar or identical to those exercised by its counterpart ministry in RS. This change will also enhance transparency within the sector, by requiring annual reporting in the Federation as is already in effect in RS.
Presently the relevant laws of the Federation are interpreted to provide MCOs with profit tax exemption, whereas the relevant provisions of RS law have been interpreted varyingly on this issue.
With a view to enhancing the chances MCOs may qualify for profit tax exemption in both Entities in the future (including after tax reforms already in the drafting stages in the Federation), it is anticipated that the MCO Laws of both Entities will be amended to avoid potential abuse of profit tax exemption. Principal among these changes will be a requirement that net assets of an MCO upon its dissolution must be contributed to one or more other MCOs, other NGOs organized for public benefit purposes or one or more B&H public bodies (whether at the State level, Entity level or a regional or local level). The anticipated changes will not permit dissolving MCOs to distribute any of their net assets outside B&H.
Perhaps the most significant changes contemplated, in terms of the long term development of the microfinance sector in B&H, will be aimed at facilitating transformations of MCOs into other commercial forms of financial institutions, once the way has been cleared for the creation such new forms. These changes are in recognition of the fact that donor capital is likely eventually to dry up, so many MCOs will find a need to access new sources of capital only available to commercial legal forms.
For example, it is expected that the MCO Laws will be amended to permit MCOs to be founders of commercial finance companies and to transfer their microloan portfolios and other property to such organizations in return for shares. Moreover, it is expected that the law will be changed to permit MCOs that have undergone such a transformation to pursue any of three possible post-transformation courses of action: (1) dissolve and distribute the shares of the newly formed company in accordance with the restrictions upon distributions of net assets described above; (2) to continue its operations as an MCO using dividends from the commercial company (perhaps serving as a kind of entry level microlender working with poorer clients and smaller loans, as a 'training ground' for clients who will eventually 'graduate' to borrowing from the newly established commercial company) or (3) become a kind of foundation that uses dividends from the commercial company to make grants to support microenterprise development in B&H (such as grants to other MCOs or NGOs providing business development services to low income entrepreneurs).
For those MCOs in a position to meet minimum capital requirements for the formation and licensing of a commercial bank (perhaps with additional investment from other strategic investors), the anticipated changes to the MCO Laws will make this form of transformation possible as well. The post-transformation options for MCOs undergoing this kind of transformation are anticipated to be the same as for organizations transforming into a finance company legal form.
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