Microfinanza Rating February 2004

BosVita – Bosnia & Herzegovina

Final rating Adequate capacity to meet its financial obligations. Good

operations. Quite stable even if it could be affected by
significant internal or external events.
BBB-
Initial rating Validity: 1 year if no relevant changes in operations or within the operation context will happen.

BosVita was registered in 2001 as a Microcredit

Organization (MCO), under the newly approved law
on microcredit and developed from an IRC program
(started in 1996). It took part in the LIP II (the
second phase of World Bank program to enhance
microfinance sector in B&H), receiving technical
assistance and financing. Recently, BosVita has
studied the possibility to merge with another MCO,
and it is now finalizing a merging process with
Partner MCO. BosVita offers individual loans
(average maturity 13,5 months) to urban and rural
economically active population in both the
Federation and the RS, where it has recently
expanded, in order to reach returnees.

Contact
Microfinanza Rating BosVita
Milano - ITALY Tuzla – BOSNIA & HERC.
Tel.: +39-02-36565019 Tel.: +387-35-252483
info@microfinanza.it bv.dir@bih.net.ba
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Headquarters of BosVita
Satellite offices

Growth rates

1,2

0,8

0,6

0,4

0,2

0
2001 2002 2003
-0,2

Active gross portfolio Equity

Active clients

BosVita has obtained an aggregated rating score equal to BBB-. This evaluation is the result of
an in-depth analysis of different aspects of the institution, considering a differentiated weight for each
area. The following table shows the score of each area1 in absolute value obtained by BosVita.

1
The external environment refers to the microfinance environment, regulation and supervision and the
positioning of the institution. It does not include an evaluation of the political and economic context.
2
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Highlights

¾ BosVita started with a specific mission on women refugees, but it has expanded towards a
wider target, formed by urban and rural economically active population
¾ It started working in the Federation, but has now expanded to new areas in the Republic of
Srpska
¾ Since the middle of 2003, BosVita has been excluded from the World Bank project (LIP)
financing as it was considered too small to absorb the established share of it. The LIP has
represented one of the main sources of funds for BosVita, that is now trying to access
commercial funds
¾ Competition is high in the Bosnian market, what contributes to the raising trend towards
mergers and acquisitions; BosVita itself is now merging with Partner MCO, one of the
biggest MFIs in Bosnia and one of its main competitors
¾ The average disbursed loan amount is about US$ 1.669, with a maximum amount of
around US$ 9.700; the interest rate ranges between 1% and 1,58% monthly flat, according
to the sector served and the cycle
¾ BosVita’s team is composed, as of February 2004, by 19 people, 11 of which are loan
officers
¾ BosVita currently operates through 3 offices: the headquarters in Tuzla and two satellite
offices, in Zivinice and Bratunac
¾ Portfolio quality is good, with a consolidated PAR30 of 2,3% as of December 2003;
currently, PAR30 is raising (it was 0,4% as of December 2002).
¾ To date, BosVita has just borrowed soft loans, financing about 54% of its assets, but is
planning to access to commercial funds, starting from 2004.
¾ As of December 2003, BosVita is performing good level of profitability and sustainability,
with ROA around 5% and ROE above 12%, an OSS of about 118% and an FSS of about
105%.

Main risk factors

¾ Low diversification in terms and conditions of financial products
¾ Clients’ drop-out
¾ Limited access to diversified financial sources
¾ Current MIS and report generation

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

INDEX

1. External Environment and BosVita positioning ................................. 5

Institutional background ................................................................................................................ 5
Political and economic context...................................................................................................... 5
Regulation and supervision........................................................................................................... 7
Market positioning ......................................................................................................................... 7
2. Governance and operational structure ................................................... 10
Management and staff ................................................................................................................ 11
Organisation and structure.......................................................................................................... 12
Management information system ................................................................................................ 12
3. Lending operations.................................................................................................. 14
Credit policy ................................................................................................................................ 14
Financial products ....................................................................................................................... 14
4. Assets structure and quality ............................................................................ 16
Assets structure .......................................................................................................................... 16
Portfolio structure ........................................................................................................................ 16
Loan portfolio quality ................................................................................................................... 17
5. Financial structure ................................................................................................... 18
Liabilities ..................................................................................................................................... 18
Equity .......................................................................................................................................... 19
Mobilization of public savings...................................................................................................... 19
6. Financial and operational results................................................................. 20
7. Strategic objectives and financial needs ............................................... 22
8. Conclusions and recommendations.......................................................... 24
SWOT analysis ........................................................................................................................... 24

Annex 1. Financial statements ............................................................................. 25

Annex 2. Financial statement adjustments................................................ 27
Annex 3. Financial ratios .......................................................................................... 28
Annex 4. Definitions ...................................................................................................... 29
Annex 5. Guidelines of reporting and accounting ............................... 30
Annex 6. Rating Scale ................................................................................................. 33

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

1. External Environment and BosVita positioning

Institutional background
BosVita was established in 1999 as Humanitarian Organisation “BOSNIA-VITA” and registered as
microcredit organization (MCO) in 2001, developing from MC project of the international NGO
International Rescue Committee (IRC). The IRC project started in 1996 upon the Dutch
Cooperation funding and was aimed at providing women refugees from Srebrenica with access to
credit and at enhancing their business efforts.
This initial focus on female refugee population was the result of a close connection with them and
a deep understanding of their situation. After transforming in Micro-credit Organisation, BosVita
preserved this first commitment, although its mission currently includes supply of financial services
in order to improve the quality of living in B&H and develop a friendly environment to clients.
BosVita works mainly in Tuzla Canton, but it is spreading its activities in Republic of Srpska
(municipalities of Bratunac and Zvornik).
Originating from a project, BosVita started operations through income surplus previously
capitalized and transferred by IRC to the organization. Since 2001, IRC has kept providing
BosVita with funding and technical assistance. As of February 2004, Bosvita’s main source of
funding is represented by a soft loan received by ODRAZ Foundation on behalf of the World
Bank; ODRAZ Foundation is also providing technical assistance. To date, BosVita is not borrowing
commercial funds, but is planning to access to them in the next future.
Currently, BosVita is undergoing a major transformation in its institutional framework, as it is in the
process of merging with another MCO (Partner); this merger is due to be finalized on the 1st of
June 2004.

Political and economic context

Bosnia & Herzegovina consists of two entities: Republic of Srpska and Federation of BiH, each
with political, legislative and judicial authority. In late 2003, for the first time in its post-war history,
the two entity governments agreed to transfer some powers to the central government, that
required a degree of co-operation never experienced for the recent years; nevertheless, relations
between the three leading nationalist parties are still tense and the reform process undergoes to
continuous obstructions and delays2.

Concerning economic structure of

the country, combined effects of the
dissolution of former Yugoslavia
and the war (physical destruction,
lack of investment and failure to
restructure) led to a de-
industrialization of B&H during the
90s, down to a share of less than
30% GDP by 2001. This decline in
industry came along with an
increase in services, accounting for
around 55% GDP by 2002; still, the
biggest part of service sector
originates from public administration
rather than from productive services.
Retail trade has also increased
significantly, becoming the second sector in both entities. Effects of transition and war can also be
seen in the share of agriculture on GDP, that is higher than elsewhere in Europe (around14% in
2001).

2
Source: Economist International Unit (EIU)

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Initial post-war growth, spurred by international investment for reconstruction, was topped at over
60% per year in 1996. Yet, reconstruction programme has so far failed to produce a widespread
economic growth. Actually, estimated real GDP growth in 2003 is at 3.5%, down from the figure
of 2002; this is the result of a deceleration in domestic demand, due to fiscal and monetary
tightening.
At the same time, after a period of hyperinflation, the consumer price index has been undergoing
a downward trend since 1997, sticking under 2% in 2002, with RS always characterizes by higher
inflation. The introduction of a new currency (KM) in 1998 was an important step towards price
control; currently, the KM is pegged to the Euro3.

In recent years, the official rate of unemployment is around 40%, but it’s hard to state the real
number because of the scarcity of statistics and the major size of the informal sector.
Unemployment remains one of the highest in the region, although it seems to have been declining
from the level reached just after the war. The main factors influencing the size and growth of the
informal economy seem to be an increase in taxes and social security payments and a lack of
adequate regulations and administrative procedures. The situation is particularly tough for
displaced persons, making up around 20% of the population; several surveys conducted among
them show that rates of unemployment tend to be 20-30% higher among displaced persons than
local people, and wages lower by the same amount.

As far as the financial and banking sectors are concerned, B&H inherited a banking sector
characterized by non-performing state-owned banks, lots of small, under-capitalized private banks
and lack of public trust, with banks involved in lending operations only to a limited extent.
Reform of the sector started in 1997 and resulted in an increased confidence in the banking
system and expanding lending operations. This was true for loans to households, while lending to
private and public business declined in proportion, particularly in RS.

Microfinance industry
After the war, in an environment where economic and financial systems had collapsed and real
estate property had often been physically destroyed, self-employment and microcredit services
represented an important opportunity to get access to the active life and market. Microcredit to low
income entrepreneurs who do not have access to the commercial banking sector entered B&H as
a pilot project just after the Dayton Peace Agreement.

According to the impact study carried out by the World Bank in 2003, potential demand for
microcredit services involves some 400.000 active poor (10% of the population) throughout B&H,
against 150.000 current clients of Microcredit Organizations (MCO).
As of February 2004, registered microfinance
institutions are 42 in B&H, most of them being Mergers in Microfinance
small and scattered. But some 16 of them are Just like in other sectors, price competition, efforts to
increase efficiency and cut costs, to reach new
quite sound and consolidated, providing financing sources and to increase market share, etc.
services to most microcredit clients in B&H and are the incentives leading microfinance industry
gathering in an Association of Microfinance worldwide to several merger experiences.
Organisations (AMFO); AMFO was informally Types of mergers in microfinance so far:
1. Consolidation of NGOs into an existing entity
established in 1999 and financed by its 2. Merger of NGOs to create a new entity
members, in order to improve and strive 3. Merger of formal financial institutions
business environment for microfinance 4. Merger of an NGO and a formal financial institution.
institutions. BosVita has always been an active Bosnian microfinance has experienced the first type of
member within AMFO and now it is in AMFO’s merger; this was the case for the following institutions,
involved in the LIP I:
BoD. In 2003 AMFO was registered as an 1.NBR Modrica, Plavi Most, and Travnik Business
Association by Ministry of Justice. Centre merged into Lok Micro Sarajevo
Among the largest microcredit providers 2. Lori Oraje merged into Sunrise Sarajevo
(EKI/World Vision, Partner/Mercy Corps, 3. Vrelo Mostar merged into World Vision/EKI.
Mikrofin/CARE), the case of EKI reflects what

3
1 € = 1,95 KM

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

is one of the main trends of this market, since it merged with another institution in 1998. Mergers
are felt as a good way towards consolidation, in an environment that is growing more competitive
and where access to funds tends to be linked to size. This seems the case for ODRAZ
Foundation, the body set up in the Federation to manage the former World Bank project – Local
Initiative Project (LIP)4, which is currently picking the biggest and most consolidated MCOs.
Another relevant feature of the market is the establishment of a private Credit Bureau in 2001,
called LRC (Long-Range Company); federal government, public agencies and international
institutions (USAID, World Bank) contributed to the start-up of the business. So far, it has involved
around 20 institutions, included both banks and MCOs and it seems to be founded on an
interesting basis; yet, as information is just partially shared among institutions and many of them
are still out of the mechanism, much work is to be done.
Besides this formal Credit Bureau, credit officers informally exchange information on clients; and
the latter is likely to be perceived even more efficient than the former.

Regulation and supervision

B&H was the first country of the region to launch a specialized regulation for microlending NGOs.
BosVita was registered as a Microcredit Organization in 2001, under the Federation Law on
Microcredit, changing from its previous status of Humanitarian Organization (acquired in 2000).
As B&H constitution leaves to the Entities the power to rule on this kind of economic issues, two
different laws were adopted in the Federation (June 2000) and RS (August 2001), after facing
some lobbying from the banking sector.

Under the present laws, MCOs are non-deposit and non-profit organizations. They are allowed
to provide business loans up to KM 30.000 (US$ 19.355) and for purposes not other than income
generation. MCOs could also provide clients with non-financial services, but most of them just
offer loans. Concerning fiscal treatment, microcredit organizations, as not-for-profit organizations,
do not have to pay taxes on their profit, while they still have to pay a 10% tax on up-front fees
(within a week from disbursement).
Please note that the main criticism practitioners address to the present law is to be too loose and
to lack of details.

Besides their similarities, the two laws present also some relevant differences in terms of
regulatory bodies; while in RS the Ministry of Finance is reliable for registration and following
supervision of MCOs, in the Federation MCOs are to register within the Ministry of Social
Affairs, Displaced Persons and Refugees, that does not provide any kind of actual supervision
after registration.

Currently, a reforming process is under way, expected to result soon in a single new draft, with
assistance from USAID and ODRAZ Foundation; among other things, Federation’s Ministry of
Finance should be charged with powers similar or identical to its RS counterpart. Generally
speaking, a higher degree of harmonization is desirable; for instance, an organization such as
BosVita, following returnees back to Republic of Srpska territories, has to deal with two different
legislations, even when working with the same client refugee-returnee.
Moreover, the reform initiative should provide for two legal forms, the non-profit and the
commercial finance company. This change is due to the acknowledgement that, with donors’ funds
not forever available, practitioners will find it necessary to access new financial sources; this new
commercial form should facilitate access to funds and is given the possibility to provide financial
services other than credit to business. Still, this new form will not be able to collect public savings.

Market positioning
BosVita mainly works in Tuzla Canton, intensively operating in municipalities of Tuzla, Zivinice,
Lukavac, Kalesija. Since January 2003, the institution has begun expanding to Bratunac, in

4
LIP program has been organized into three components: 1. Provision of financing to best-performing MCOs; 2.
Institutional Capacity Building; 3. Support to the creation of two Foundations (in the Federation and the RS), linked to the
governments and responsible for the project management.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Republic of Srpska, and is thinking of reaching the area of Podrinje, in order to follow its clients
returnees.
Most part of BosVita’s clients work in the informal sector; as of December 2003, some 29% of the
active clients were working in trade sector, 36% in agriculture and around 30% in service
and small production. BosVita offers individual loans with an average of KM 7.850 (US$ 5065),
that is lower than the one of main other practitioners operating in the area. Particularly, a first cycle
loan is as low as KM 2.000 (US$ 1290). Interest rates range, according to the product between
1% and 1,58% flat per month.

Although the potential market is quite wide, competition in B&H is already high. Indeed, MFIs start
feeling competitive pressure on both sides. Besides competition for reaching good clients, MFIs
are also facing competition to share the limited financing from donors. Therefore, in order to cope
with the growing competition, MCOs choose to merge, which is also the case for BosVita and
Partner; a more demand-driven approach is also a way to deal with competition, a behaviour
shown by both BosVita and Partner, that implemented a program of focus groups to better identify
clients’ needs.

So far, among BosVita’s main competitors we may mention Partner itself, EKI and Mi-Bospo.

Banks also represent a competitive alternative for better-off clients, asking for bigger amounts,
longer terms and purposes such as consumer or household loans. By the way, this kind of clients
just marginally belong to the target group focused by BosVita (for that reason BosVita has never
thought of setting a higher size ceiling); nonetheless, drop-outs seem to move more frequently
towards banks than towards other MCOs.

In such a context, BosVita shows some competitive advantages:

- a highly professional staff (this considered by Partner one of the main values brought
into the new institution by BosVita);
- a friendly approach and simple procedures, compared to banks and other MCOs;
- support in drawing a business plan;
- explicit focus on returnees, in RS.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Nevertheless, BosVita is quite a small institution, the smallest among its main competitors and it
is about to encounter some difficulties in raising funds, since ODRAZ has excluded it from the
institutions it is going to finance in 2004.
Among the competitive disadvantages there is some little flexibility in financial product
characteristics, basically concerning agricultural products (lack of grace period, higher interest rate,
shorter term).

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

2. Governance and operational structure

Currently, BosVita is going through a deep institutional transformation, that will bring it to a
merger by joining with Partner, another MCO based in Tuzla. BosVita will disappear as an
independent organization and its skills, presence on the ground and professionalism will converge
into the new institution, supported by a substantial similarity as for institutional culture between the
two entities.

Ownership and Governance

BosVita’s Board of Directors is composed by 5 members (plus a member from ODRAZ
Foundation), characterized by different backgrounds and specializations (economics, law,
administration, association), relevant for BosVita activities. At the moment, there is no financial and
banking expert sitting in the BoD, what may be a lack in case of discussion of financial-related
themes and specialized advice would be desirable. Within the Board, members have no specific
assignments, but share duties and responsibilities; by the way, a manual of functioning exists
for the BoD.
IRC is no more represented. The Board members are estimated local professionals and they
seem to actively Composition of the BdO
share the sustainable
approach, adopted by MEMBERS Institutional charge Profession & Background
the institution,
together with its social Communal inspector at Tuzla Municipality
mission. However, as Department for Inspections. Refugee
Čosićkić Sead Chairman of BoD
they mainly have no himself, he has rich experince in work with
refugees
experience in
microfinance sector,
specific trainings Consultant within the NGO BOSFAM.
have been organized Ferhatbegović Zehra Local professional Refugee herself, she has rich experince in
for the Board in the work with refugees.
last year, upon
financing by ODRAZ Experienced lawyer, working in her own
Foundation and Škarica Jadranka Local professional
office. Active in NGO work.
provided by
international
Consultant for international co-operation,
consultants. Actually, Kakeš Svjetlana Local professional she worked as an advisor for the Governor
after their mandate of Tuzla Canton. Active in NGO work
expired in January
2003, some of the
Consultant for profit tax for legal persons in
previous members Džinić Besim Local professional Tuzla Administration; experience in financial
were kept in charge, reporting in B&H
for sake of continuity
of work and
commitment. Member Odraz Odraz Representative
BoD meets on a
regular basis, at least quarterly, while the president has daily contacts with the management,
ensuring a continuous communication flow between the BoD and the operational staff.

At the moment, the Board is involved, as the rest of the institution, in the rapid but intensive
process of merging. While it has been following the process since the beginning, it has not met
Partner’s Board yet. A meeting between the Boards is fixed before the merger will take place the
1st of June 2004. The composition of the new institution’s Board should be decided jointly by the
two institutions and it should count 9 out of 13 members coming from Partner’s Board.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Management and staff

BosVita operates in Tuzla Canton and other areas in the Federation and has just expanded in the
Republic of Srpska.
BosVita’s staff is composed by 19
people, including 11 loan officers and
has been growing for the last years.

At the beginning, the Executive Director

of BosVita managed general and credit
operations, supported by a Finance and Administrative Director.
As of now, beside the Executive Director, BosVita’s top management is composed by a Financial
manager (supported by an accountant coming once a week) and a Credit manager; therefore, the
Executive Director reduced her operating role and can focus on strategic planning and supervision.
The top management seems to closely work in team.
BosVita developed procedures for human resource management and job evaluation system and
bonus system.
As of February 2004, those loan officers who have recently been hired (May-June 2003), have not
been assigned an office yet, and this affects their current working conditions.

Within BosVita’s organizational chart, it does not appear the Internal Controller, while there is a
manual including implemented procedures for internal control. At the moment, this task (internal
control) is carried out by the top management, through a system of crossed checks on the
operations, while general monitoring on respect of the procedures and regulations is entrusted to
the Financial management. Actually, in view of a progressive growth of the institution, a more
systematic and structured internal control should be implemented, providing for strictly applied
procedures and precise responsibilities.
By the way, before the merger was planned, a specific function for internal control was meant to be
created in 2004 (according to the strategic plan 2003-2005).

On the whole, the transformation of the organizational chart after the merger is a crucial and
delicate issue; discussions are under way to decide how the management of the new institution
will be composed and no definitive decisions have been made yet. In any case, the quality of
BosVita’s personnel is among the aspects Partner appreciates the most.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Organisation and structure

BosVita mainly operates in Tuzla municipality, through its headquarters. However, credit activities
cover another 11 municipalities in the Federation (with an office in Zivinice). Since 2003, BosVita
has expanded to the Republic of Srpska with two loan officers and established an office in
Bratunac. This expansion is mainly due to the desire to follow returnees clients back home.
Actually, there are no real structured branches, but mere offices where loan officers may be
visited by clients, communicate with the headquarters and receive schedule of repayments for the
month and notification of payments status from Tuzla.

BosVita is still a small institution, characterized by very little level of decentralization in its
operations, with Credit Committee just meeting at headquarters level (but, since January 2004, a
committee of loan officers based in Tuzla can approve loans up to KM 5.000 – US$ 3.225); at the
same time, there is almost no decentralization at all in its policies (with loan officers just
implementing policies adopted by the headquarters).
In general, all financial movements are managed by the headquarters.
Since it is still a small organization, with no specific internal control function and no structured
branches, such a degree of centralization is justified. As BosVita grows, a greater sharing of
responsibilities may be expected, and, specifically, when it will join Partner MCO, which is
characterized by a higher level of decentralization.

Management information system

In 2003, BosVita has finished its data transfer from the old MIS in Excel to a new and more
sophisticated system, that improved the information management within the institution. The new
MIS consists of two software, a loan tracking system and an accounting software, which are not
integrated, what still hurdles the communication flow, despite relevant improvements.
MIS is not set up in local offices, that are not even provided with a computer. BosVita has a
centralized information management and loan officers can neither enter nor obtain data
directly5. At the headquarters, MIS officers deal with data on loan processing and repayment
monitoring and, on the other hand, general accountancy is managed by the external accountant;
these functions are supervised by the Credit Manager and Finance Manager respectively.
However BosVita’s MIS is on the whole adequate to the size of the institution, but it should be
reconsidered as it grows and decentralizes.
The loan tracking software does not seem to be very powerful, especially in terms of reports
generation. Indeed, even if some standard reports are automatically generated, others are not
systematically produced and monitored, just being available upon specific request. As of February
2004, this is mainly true for data on portfolio quality divided by product, essential to understand
risks connected to each single product/sector served.

After the merger, BosVita will adopt Partner’s MIS, which is completely different and more
sophisticated, although not integrated. BosVita’s MIS is convertible into Access; this should
facilitate the data transfer, since Partner uses Access as a MIS.

Personnel policy
Being such a small organization, BosVita has no human resources’ department, while related
issues are treated by the credit and finance managers, respectively on the credit operations and
administration side. The Executive Director is in charge of supervision.
The bulk of BosVita’s personnel was formerly employed within the IRC project and they appear
very motivated and committed to the mission; this seems to be the case for the newly selected
staff as well. The personnel policy is based on the following elements:
¾ careful selection and recruitment of people, with good level of education and
commitment, to be trained on microlending topics, both theoretically and on the field; even
after this first selection and the training period, it occurred that people were dismissed for
lack of capabilities on the job;

5
Loan officers are informed on the status of their clients on a daily basis; the communication takes place at the
headquarters or on the phone/fax (satellite loan officers).

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

¾ all new credit officers have a training period of one month, during which they follow and
learn all the lending operations.
¾ salaries seem to be lower than in the banking sector, and even than in the largest
MCOs; yet, people are motivated and seem to be conscious that their lower salaries
depend on the differences in mission, costs and income between institutions;
¾ an incentive scheme exists just for loan officers, which seems to be quite effective,
motivating and portfolio quality-oriented. On the other hand, administrative staff is excluded
from the incentive mechanism, upon an explicit policy of the management. Assigning the
bonus, portfolio’s size and quality are particularly stressed; concerning the quality, for
instance, loan officers are not entitled to get the bonus if they have write-offs in their
portfolio. No difference is made between more and less difficult areas; what may put under
greater pressure loan officers working in hard areas.
¾ once a year, an assessment of the personnel is carried out by the management, what
also helps identify the development of training needs; according to emerging needs,
BosVita organises internal and external (ODRAZ Foundation, Carl Bro Consulting,
MicroFinance Center-Poland) training sessions for its staff.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

3. Lending operations
Credit policy
Started with a specific mission of giving access to credit to women refugees, BosVita currently
provides urban, peri-urban economically active population and refugees with individual
lending and has expanded to rural areas, especially in the RS. In order to secure repayments
within its individual lending scheme, clients have to provide 2 to 3 guarantors, depending on the
size of the loan. BosVita, like most Bosnian MCOs, does not provide non-financial services.

Portfolio is quite equally distributed by sector (agriculture, trade, small production and
services), with agriculture in rise (from 25 % as of December 2002 to 36% as of December 2003);
it is worth noting that credit policy is explicitly shifting towards agriculture, as this sector is felt to
be less risky6.
Loans are used to finance working capital as well as equipment, but there is no specific product to
finance fixed assets.

Eligible microenterprises are not required to be formally registered and most actually are not; by
the way, BosVita encourages its clients to register their business (in terms of providing loans for
registration of the business).
BosVita does not a priori exclude clients who have already taken on loans with other institutions,
but analyses their capacity to repay the overall amount of debt. BosVita considers that such a
condition does not necessarily prevent them from being good clients.

Financial products
BosVita is currently issuing 4 products, basically divided by sectors:
¾ Agricultural product;
¾ Trade product;
¾ Small production and services product;
¾ Returnees product.
The products show similar characteristics, as you can see from the following table:

6
Despite agriculture is generally considered as the riskiest sector.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Lending products do not show much diversification and flexibility.

Loans targeting different sectors have very identical features, a part from the interest rate, where
trade loan is the most costly and credit to returnees has lower interest rate.
A more appropriate adaptation of the loan terms to specific needs that may raise from each
sector is missing. For instance, credit methodology for lending to agricultural activities does not
take into account seasonality and product cycle (through the provision of grace periods, frequent
interest repayments and later principal repayments, etc.). On the other hand, lending to trade
activities do not present specific and appropriate conditions (like higher repayment frequency,
meaning smaller instalments, shorter terms, etc.). Credit to returnees is not split into different
products, according to their needs (for instance, agriculture, trade, etc.), neither there is any
diversification of lending conditions of loans for working capital and fixed assets.

Flexibility could also be improved concerning the policy of guarantees. In fact it is not always easy
for clients to find guarantors (with acceptable features), yet, they are the only possible guarantee
on loans to present7. BosVita is aware of this situation and is thinking to adopt the group lending
methodology in rural areas, where obstacles to find guarantors are most relevant.

Procedures for loans issuing

BosVita has quite a rapid disbursement process; on average, it takes a week time and it does
not make almost any differences between new and repeated clients. This could be a comparative
disadvantage in relation to potential competitors, that are able to reduce processing loan renewals.

The evaluation of the client’s repayment capacity is based on a combined analysis of client’s
character, forecasted cash flow of the economic activity to be financed and a business plan,
prepared with the support of the credit officer. Concerning household’s cash-flow, BosVita just
takes into consideration income, but not expenses; this could distort the assessment of the
repayment capacity of the client. The loan officer is also responsible for a private statement on
property (ex: car), that may be pledged in the court. Depending on the loan size, the client needs
to provide two or three guarantors. The guarantors will guarantee for the loan with their monthly
salaries, 1/3 of which is to cover the monthly instalment of the loan.

Concerning loan approval, all the business proposals loan officers have not refused, are discussed
within a credit committee formed by the Credit Manager (in her absence Financial Manager, or
Director), a member from Administration and the loan officer. The committee practically meets
once a week in Tuzla; the decision-making process is centralized, also given that there are no
organized branches. Loan officers far from Tuzla, come at least every two weeks to have their loan
requests approved. Since January 2004, loan officers based in Tuzla may make up a committee
and approve loans up to KM 5.000 (US$ 3.225).

The disbursement of the loans is made through a banking order of payment.

7
We acknowledge that other kinds of guarantees are quite hard to get: actually, mortgage is very costly and
it risks not to be sustainable for clients, while pledge is not regulated by the law. Nevertheless we consider
that guarantee requirements applied by BosVita could be diversified according to the risk profile of the
applicants (credit history).

15
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

4. Assets structure and quality

Assets structure
As of December 2003, BosVita net
portfolio represents 89% of the total
assets which means a very good degree
of resources’ concentration into the core
business. Net fixed assets is 2% while
liquidity represents about 7% of the total
assets, which is an acceptable level, also
considered BosVita’s financial structure.
Due to the shortage of capital funds,
BosVita does not hold neither short term
nor long term financial assets for
purposes of temporary investment and
liquidity management.

Portfolio structure
When BosVita started its operations in March 2001, it inherited the capital of the previous IRC
project but during its first year of life it did not receive any other source of funds to finance its
portfolio. This explains the very little growth in 2001 (5,5%). The growth of BosVita’ s portfolio has
then continued to increase gradually over the last two years; this was mainly due to the loan,
received from
ODRAZ in five
tranches (from
September 2002 to
June 2003). Yet, we
can record a slow
down in the growth,
during 2003 (from
77,5% during 2002
to 52,2% during
2003). In fact, in
2003 BosVita was
expected to receive
a second loan from
ODRAZ, but the
Foundation decided
not to continue financing BosVita. The difficulties to raise new funding sources could represent a
big obstacle to BosVita’s growth and, on the other hand, this represents one of the main reasons
why BosVita opted to merge with Partner.
As of December 2003, portfolio structure
shows a concentration into the agricultural
sector (36%), that has increased over the
last years8 from 20% in 2001 to 25% in
2002). Trade portfolio and service/small
production portfolio are respectively 28,9%
and 30,3%, while loans dedicated to
returnees amount at 4,8% of the
outstanding portfolio. The trend to increase
the percentage of agricultural loan should
be kept under control, trying to maintain the
balance of portfolio structure, avoiding the
8
In fact BosVita Management stated that its strategy is to increase the percentage of agricultural portfolio
respect to trade and service/small production portfolio, considering the latter more risky.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

concentration of risks into a single sector.

The average amount disbursed has been increasing over the years from US$ 964 to about US$
1.700, mainly due to the progression of clients in the loan cycles. The share of female clients is
about 62% as of December 2003. The average size of loan disbursed on per capita GDP is 89%
as of December 2003, showing a non exceptional outreach in depth. The average loan term is 13
months and the repayment frequency is monthly. The diversification of lending terms is weak,
and it would probably be better when offering shorter loans to traders whose activities have a
shorter cycle and a faster cash flow, in order to reduce the risk of portfolio and to better adapt
products’ conditions to the real financial needs of clients.

The annual drop-out ratio of BosVita seems to be quite high (41,3%, as of December 2003)
even if it is decreasing (61,3% in 2001, down to 43,8% in 2002). Bosnia is a very competitive
environment and BosVita should systematically track and monitor this ratio, in order to find out
measures to reduce it and improve clients retention. However since 2002, thanks to the Ford
Foundation Impact and Assessment Program, BosVita has been carrying out exiting interviews.
This could help the institution to better understand the reasons behind the clients’ drop-outs which
are still not very clear.

Loan portfolio quality

Portfolio quality is good with
a consolidated PAR30 of 2,3%
as of December 2003. This is
also true taking into
consideration the write-off
ratio, which has always
maintained between 1 and
1,5%9 (1,2% as of December
2003). Nevertheless we can
observe a worsening in
portfolio quality over the last
year, since PAR 30 increased
from 0,4% in 2002 to 2,3% in
2003 (it was 1,1% in 2001).
The lack of diversification of the terms of financial products and clients’ over-indebtedness (mainly
in such a competitive environment as Bosnia & Herzegovina) could be considered as the main
reasons behind the worsening of the portfolio quality. Concerning PAR 30 by sector, this counts for
0,8% for agriculture, 2,2% for trade and 4,2% for service and production.
Indeed, BosVita’s stated strategy is to increase the share of agricultural portfolio, that is perceived
less risky than the other sectors . So far, BosVita does not seem to be affected by any of the
typical problems related
to agriculture,;
nevertheless, an
excessive increase of
the agricultural portfolio
involves potential risks
to be monitored. Risk
coverage ratio is at a
good level (119,8% in
December 2003), but
should be carefully
monitored, if PAR 30
keeps growing.

9
The rate of recovery of write-off has been not always satisfactory with an annual income as of December
2003 equal to 0,1% of the average portfolio.

17
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

5. Financial structure
So far BosVita has based its growth on
donations received trough IRC and,
starting from the end of 2002, on
subsidised loans received by WB, through
ODRAZ Foundation.
As of December 2003, the debt/equity
ratio is 1,42. It has decreased, compared
to 2002 (1,64%), even if liabilities have
increased in absolute terms and it is in part
due to the transformation of most of the
restricted funds into equity (see paragraph
below). Although the level of indebtedness
is not so bad, there are still possibilities for
improving it, mostly in terms of access to
commercial funds.
BosVita management is aware that it is
difficult to find new donors and that commercial funds represent the main source for the necessary
process of scaling-up the business and consolidating financial self-sustainability.
The main obstacle to BosVita growth could be the difficulties to raise new funding sources. Also for
that reason, BosVita has decided to merge with Partner MCO. The new institution, resulting from
the merger, will be surely facilitated in raising either commercial loans or new grants.

Liabilities
BosVita is currently10 financing about 54% of its assets through borrowed funds. As of December
2003, BosVita had received loans, worth of US$ 1.263.000 (92% of its total liabilities). This amount
represents a single loan financed by the World Bank and delivered by ODRAZ Foundation. This is
a subsidized loan (for the moment the
annual interest rate is 5%11)
denominated in Euro (€ 1.000.000). It
was delivered to BosVita in 5
instalments12, each one of € 200.000,
starting from September 2002. The
loan has a very long term (15 years)
with semi-annual repayment of
principal starting from September 2007,
and monthly repayments of interest
starting from the date of disbursement.
As of December 2003, the amount of
restricted funds (5% of total liabilities)
is composed by the revolving funds of US$ 75.000, provided by IRC in two instalments
respectively in May and October 2002. Upon the successfully fulfilment of all the conditions set out

10
As of December 2003.
11
Please note that this interest rate, normally considered commercial when referred to loans in foreign
currency, is here considered as subsidized, given the fact that KM is pegged to Euro and, accordingly, loans
in Euro are more or less as risky as local loans. ODRAZ requires an adjustment for ratio, based on a 10,5%
interest rate.
12
The installments were delivered in the following dates:
- September 2002
- November 2002
- January 2003
- April 2003
- June 2003

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

in the agreement13 with IRC, this restricted funds will be transferred to BosVita as a grant after two
years.
Such a liabilities structure is particularly favourable, with no maturity gap (the average term of
the active portfolio is 13,5 months and the current ratio in December 2003 was very high, 51,9) and
with a very low financial cost (cost of funds ratio is 4,72% as of December 2003). Moreover, given
the fact that the local currency (KM) is pegged to the Euro, also the foreign currency gap risk is
practically inexistent14. Nevertheless, these aspects (especially the first two) should be taken into
consideration since the institution is planning to start borrowing commercial funds15. There
are potential risks related to the little experience of the actual management in tapping and
managing different sources of funds and a strategy to deal with liquidity management, maturity
risk and currency risk of borrowed funds denominated in foreign currencies is missing.

Equity
Most of BosVita’s equity, worth of US$ 973.871 as of December 2003, comes from the
capitalisation of the interest income inherited by the IRC project and from the two grants for
loan capital received in June 2002 and June 2003 always through IRC, respectively by the
Consortium of Austrian Donors (US$ 130.940) and the Dutch Government (US$ 311.284)16.
The revolving loan from IRC (US$75.000) is going to become donated equity during 2004.
A part from this, BosVita is not foreseeing to receive other donated equity in the next years, so we
can affirm that its capitalisation strategy is mainly based on capitalisation of earnings and, given
the current positive results, it will constitute a growing component of the equity.
In fact, the institution has started to generate net income (US$ 33.869) since 2001 and it is now
improving (US$ 93.973 as of December 2003).

Mobilization of public savings

BosVita is not collecting savings. Currently, in Bosnia & Herzegovina only commercial banks are
allowed to collect savings, financing portfolio’s growth through a relatively cheap resource. The
transformation into a bank is not taken into consideration as a feasible possibility by BosVita.

13
BosVita has to capitalize quarterly at least 30% of the total income generated by the loan.
14
Nevertheless BosVita has included into its contract that the hypothetical risk of currency devaluation would
be borne by the clients.
15
Mainly after ODRAZ has refused the second tranche of the loan fund (US$ 1.000.000) to BosVita
16
Both these amounts represent the loan fund inherited by the IRC project. However when BosVita started
its operations in 2001, these amounts were transferred to BosVita accounts as liabilities (classified here as
restricted funds) and not immediately as equity. Upon successful fulfillment of the conditions, as stipulated in
the agreement, the ownership of the funds has been automatically transferred to BosVita, according to the
following schedule: June 2002 for the loan funds provided by CAD and June 2003 for the one provided by
the Dutch Government.
Therefore the growth of equity over time occurs in parallel to the reduction of the restricted funds, without
considering a new restricted fund received in May 2002

19
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

6. Financial and operational results

As of December 2003, BosVita is
performing positive levels of
profitability and sustainability, with
ROA around 5% and ROE above
12%17, an OSS of about 118% and an
FSS of about 105%.
However there has been a little
worsening in profitability and
sustainability between 2001 (date of
creation of BosVita) and 2003.In 2001
BosVita had a ROE and ROA
respectively of 13% and 6% and OSS
of 120% and FSS of 115%. These
figures slowed down during 2002,
mainly due to a sharp reduction of
portfolio yield (from 36,55% in 2001 to
29,4% in 2002) and went up again in
200318, thanks, again, to the
improvement of the portfolio yield (from 29,4% to 32,4%) and to the reduction of operating expense
ratio (from 25,6% to 21,5%). However, it is quite impressive that BosVita has been fully profitable
and sustainable since its creation.

The level of efficiency, measured by the operating expenses ratio, is good with a positive
decreasing trend, from 29,7% as of December 2001 to 25,6% as of December 2002 down to
21,5% as of December 2003. Staff allocation ratio is also good always with almost 58% of the staff
being loan officers.

Loan officers productivity could be improved from the current level (as of December 2003) of
187 active borrowers per loan officers. However it is worth to stress that loan officers productivity is
biased by the fact that there are four new loan officers (hired in May-June 2003), that cannot be
considered fully productive yet, as they have not had time to completely build up their own clients
portfolio.

The funding expense ratio has increased for the last three years (from 0% in 2001 to 0,65% in
2002 and up to 2,93 as of December 2003), mainly because of loan instalments received from
ODRAZ in 2002 and 2003. However, this ratio has always maintained low, due to the fact that
BosVita’s borrowed funds are all subsidised.
Provision expense ratio has always been settled at an acceptable level. It has been under the
threshold of 1,3% until 2002. In 2003, it has increased to 3,8% mainly due to a worsening in
portfolio quality (PAR 30 grew from 0,41 in 2002 to 2,3% in 2003) but also because of the growth in
the outstanding portfolio (BosVita’s provisioning policy includes 1% of the performing outstanding
portfolio).

Concerning portfolio yield, after the sharp drop during 2002, caused by BosVita management
decision to reduce up front fees (from 4% to 2%) and interest rates, it has increased again during
2003. As of December 2003, it was 32,4%, allowing BosVita to be fully self-sufficient, since the
cost structure (operation expense, cost of funds and provision expense) sums up 28,2% of the
average gross portfolio. Nevertheless, in the future, BosVita could be forced to lower its interest
rates because of the strong competition and shall access to commercial financial sources in order

17
AROE= 3,62% and AROA= 1,45%.
18
The only ratio that has not increased from 2002 to 2003, is the FSS (109,5% in 2002 vs. 104,9% in 2003).
This is due to the fact that the amount of adjustments in 2003 is much higher than in 2002 (see Annex 2),
mainly because of the soft loan from ODRAZ, whose biggest part has been received in 2003.

20
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

to finance its growth19. These evolutions could put under pressure its profitability and sustainability,
reducing portfolio yield and increasing funding expense ratio. Given this scenario, BosVita should
keep consolidating its self-sufficiency mainly focusing on the further reduction in operating
expenses, as well as on the improvement of productivity and the growth of portfolio that is
crucial for its profitability and sustainability performance.

19
Undoubtedly, the scenario could be very different in view of the merger with Partner.

21
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

7. Strategic objectives and financial needs

BosVita is in a very delicate, transitional phase of its development, preparing for merger by
joining with Partner. On the 1st of June 2004 BosVita will stop existing as an independent
organization. While negotiations have been very rapid, steps to implement an effective merger
have been carried out in an intensive and effective way; nevertheless, the two institutions have
not drawn a common strategic plan yet. This situation does not allow to directly identify
strategies the new institution will adopt to grow and finance its development.
Therefore, concerning BosVita, we can just focus on the Strategic Plan 2003-2005, drawn before
the merging process was concretely started up. Among other things, the plan forecasted the
following options to be implemented:
¾ a diversification of the market, including geographic expansion of the operations to the
Republic of Srpska, particularly in Podrinje area (under the hypothesis that unmet demand was
still wide and that refugees were mainly willing to return);
¾ product improvement
¾ research of financial resources: at that time BosVita was supposed to obtain a new loan from
ODRAZ starting in 2003, what should have constituted the bulk of future financing; beside that,
BosVita was planning to access to a range of commercial and soft loans. Actually, in April 2003
ODRAZ refused to provide BosVita with the expected tranche (strictly KM 1.000.000 for each
institution), presumably for supporting institutions with bigger scale. Given this hardship,
BosVita’s financial projections forecasted to access to up to KM 500.000 funding resources in
2004-2005; this included loans from local banks (divided into KM 200.000 from Nova Banka
and KM 200.000 from Raffeisen Bank) and a loan from Blue Orchard.

In this context, in the middle of 2003,

BosVita started thinking of merging
with another MCO to strengthen its
market positioning and to have an
easier access to funding. Among
institutions with compatible mission,
culture and credit methodologies,
BosVita identified Partner MCO as the
most interesting one, given also its size
and growth potential.
The merging process has been
planned and organized into different
steps, that are being implemented
through the support of a consulting
company (Adizes Management
Consulting – Novi Sad). The technical
assistance included a preliminary
evaluation of the two institutions, in
order to understand how consistent
they were in terms of organization and
institutional culture and a substantial
compatibility arose from this analysis.
Accordingly, they established some
working groups within each institution
and fixed some common workshops
to figure out the different aspects of the
merger; in such a way, the staff of the
institutions could be effectively involved
in the process. The following step
focused on new overall strategies to
Partner MCO
After starting operations in 1997 as a Mercy Corps program,
Partner was established as a local microcredit organization in
2001, under the federation Law and is now among the largest
Bosnian microcredit institutions. Partner is now in a positive
growth trend, that has led its active portfolio from US$ 9,976,448
as of December 2002 to US$ 15,321,304 as of December 2003.
Accordingly, it is undergoing a process of internal change, in
order to streamline procedures and improve organization (for
instance, from 1 to 2 internal auditors, establishment of a Human
resource department and, recently, of a MIS team, etc.).
Within this development process, Partner has negotiated a
merger with BosVita MCO that has to be finalized on April 1st
2004 and is intended to improve competitiveness of both the
institutions. Said that, Partner looks at BosVita’s personnel as its
main added value for the merger.
While Partner has adopted more decentralized approval
procedures (adequate to its more structured presence on the
territory) and refused to take over differentiated credit conditions
for refugees, the two institutions are characterized by a very
similar culture and geographical/targeting vocation. Indeed, the
consulting company supporting the merger stated that Partner
and BosVita are to be considered at the same stage of
development, despite their differences in size and organizational
structure.
Partner presents some relevant strengths in terms of credit policy
and portfolio quality, human resources management, marketing
and efficiency and profitability.
However, some aspects of its internal organization will be put
under pressure by the merger; that is the case for its human
resources department, facing one of the most delicate issue in
the merging process, even if it can count on an strong personnel
policy; at the same time, the product delivery and the MIS
integration will represent issues to be monitored.

22
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

adopt, mission and vision. The third step has just taken place, concerning organizational
structure and personnel, one of the most delicate stages within the process.
On the 1st of June 2004 the merger will be effective.

The merging process has been carried out in a very fast, though intensive way. Some issues are
still not defined, such as a common Business Plan, common procedures and policy and common
products (that are due to be identified in the future. For the moment, Partner’s products are going
to be used). On the other hand, while the management and staff are definitively involved into the
process, clients are supposed to be up-dated only during the last month before the merger takes
place. Even if things like the personal relationship between the client and the officer may smooth
out the perception of the change, it is still necessary that the clients learn to trust the new
institution. Concerning this point, BosVita is willing to implement a communication plan, before the
merger through leaflets distribution and direct explanations to the clients. Beside that, the BoDs of
the 2 institutions, after having participated in the decision making and in the drawing of the
agreement, have not played an active role in the further steps of the merging process. Discussions
between BoDs are going to take place before April 1st, in order to define the composition of the
future BoD.

23
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

8. Conclusions and recommendations

SWOT analysis

The main characteristics of BosVita are summarized in the following table:

SWOT analysis of BosVita
Strengths: Weaknesses:
¾ Motivated and qualified staff ¾ Low product diversification (loan terms do not
¾ Operational and financial results match business cycle of financed activities)
¾ Good consolidated PAR30 ¾ Improvable flexibility for the system of guarantees
¾ Quite low and decreasing operational costs required on loans
¾ Customer friendly approach ¾ Current MIS and report generation
¾ An internal control system to be enhanced
¾ Drop-out ratio
¾ Improvable productivity
¾ Difficulties in accessing to diversified financial
sources.

Opportunities: Threats:
¾ Forecasted Merger with Partner (easier access to ¾ Strongly competitive environment
funding, consolidation, etc.) ¾ Not completely adequate regulation
¾ Expansion to new geographical areas ¾ Possible risks related to the merger (relation with
¾ Presence of a credit bureau for microfinance clients, difficulties in integration, etc.)
institutions and banks, whose effectiveness could
be developed
¾ Opportunities offered by AMFO development and
networking activities in general

We are recognizing that the institution is undergoing a phase of substantial transformation,

affecting most of its components. However, we are here considering BosVita as it is now and we
have evaluated issues currently relevant in its potential development as a single, independent
entity. Priorities for BosVita should be:
• Diversification of the terms of financial products, in order to better fit different sectors
specificities
• Diversification of the guarantee system
• Development of the Management Information System, in terms of integration and
generation of reports, especially in view of a progressive growth of the institution
• Formalization and consolidation of the role and post of internal controller, what is becoming
more and more necessary as procedures get structured and the organization expands
• Improvement of productivity
• More accurate monitoring of drop-out ratio, as it seems that the institution is not completely
aware of what are the main reasons behind non renewal of loans. Starting from the
experience developed within the Ford Foundation Impact Assessment Project, BosVita
should keep improving its exit monitoring system.
• Deepening exploration of new funding opportunities, especially commercial ones.

We are dealing with a small institution, that, since its inception, has shown very good personnel standards and a great
commitment towards sustainability, beside its social mission. Actually, BosVita’s financial results and portfolio quality are
remarkable, while their trend has not always been positive. In the future, BosVita should focus on productivity and cost
reduction, given that it is operating in an increasingly competitive environment (with pressure on active interest rates) and
that it is pushed towards commercial sources (resulting in a reduction of its financial margin). By the way, according to its
size, plans and financial projections, the institution shows an adequate absorption capacity of potential new funds.
The merging process that is going to be finalized on June 1st represents an exceptional opportunity for BosVita to
improve its performances with regards to clients satisfaction, procedures and communication streamlining, organizational
structure and, particularly, access to funds and their management. Although we acknowledge that this is a delicate
phase in BosVita’s life cycle, on the whole, we look positively at the merger and its future developments.

24
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Annex 1. Financial statements

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

26
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Annex 2. Financial statement adjustments

The financial statements in Annex 1 are the result of standard reclassification. They are
expressed in US Dollars as the result of a conversion of KM at the exchange rate of the closing
data of the financial statements. The numbers are based on audited financial statements while the
one of December 2003 is based on the financial statement prepared by BosVita.

Financial statements have been then adjusted to allow a comparison with other institutions
which use a different logic of presentation of the information and to evaluate the level of
sustainability of the institution with market conditions.
The main adjustments normally are:
adjustment for the accrued interest on delinquent loans
elimination of subsidies (donations in kind20 and soft loans21)
provisions are calculated with a standard formula22
adjustments for inflation
adjustments for write-off23
For the year 2003, the most relevant adjustment for BosVita is related to the subsidized cost of
funds, due to the soft loan received from ODRAZ. Adjustment for inflation are not so high due to
the low inflation rate. We have a positive adjustment for donations in-kind just in 2003 when
BosVita received some trainings and consultancies without recording their costs among the
operating expenses. No loan loss provision adjustment is due given the constant over-provisioning
of BosVita respect to the benchmark.
The cumulative effect of all these adjustments reduces the net income in all the periods.

20
Donations in kind are valorized and added to operational expenses.
21
In the income statement it is registered the value of the difference between financial costs of the institutions and
financial cost evaluated at the market rate. In particular, in the case of loans in local currency, it is considered 75% of the
average lending rate in the national market (IFS Line 60P). In the case of loans denominated in foreign currencies (US$
and Euro), it is considered the average value of Libor 1 year plus 3%.
22
Provisions are calculated according to the following formula:
Portfolio: 1-30 days 10% Restructured loans >1 day 100%
31-60 days 30%
61-90 days 50%
>90 days 100%
23
Loans past due more than 180 days are written-off.

27
Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Annex 3. Financial ratios

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Annex 4. Definitions

Description of the ratio Formula

Return on equity (ROE)
Adjusted return on equity (AROE)
Return on assets (ROA)
Adjusted return on assets (AROA)
Profitability Operational self-sufficiency (OSS)
Financial self-sufficiency (FSS)
Profit margin
Net income before donations / Average equity
Adjusted net income before donations / Average equity
Net income before donations / Average assets
Adjusted net income before donations / Average assets
(Financial revenue + Other operating revenue) / (Financial
expenses + Loan loss provision expenses + Operating expenses).
(Adjusted financial revenue + Other operating revenue) / (Adjusted
financial expenses + Adjusted loan loss provision expenses +
Adjusted operating expenses)
Net operating income / operating revenue

Portfolio at Risk (PAR30)
Arrears rate (> 1 day)
Rescheduled/refinanced loans
Provision expense ratio
Portfolio Loan loss reserve ratio
Quality Risk coverage ratio (>30 days)
Write-off ratio
Drop-out ratio
Portfolio at Risk > 30/ Average gross portfolio
Arrears rate > 1 day / Average gross portfolio
Restructured loans / Average gross portfolio
Loan loss provision expenses / Average gross portfolio
Accumulated reserve / Gross portfolio
Accumulated reserve / Portfolio at risk >30 days
Write-off of loans / Average gross portfolio
(number of active clients at the beginning of the period + number of
new (first time) clients entering during the period - number of active
clients at the end of the period) / (number of active clients at the
beginning of the period)

Staff allocation ratio Loan officers / Total staff

Loan officer productivity – Borrowers Number of active borrowers / Number of loan officer
Loan officer productivity – Amount Gross portfolio / Number of loan officer
Efficiency Staff productivity – Borrowers Number of active borrowers/ Number of staff
and Staff productivity – Amount Gross portfolio / Number of staff
Productivity Operating expenses ratio Operating expenses / Average gross portfolio
Cost per loan lent Operating expenses / Average active loans
Administrative expenses ratio Administrative expenses / Average gross portfolio
Personnel expenses ratio Personnel expenses / Average gross portfolio

Portfolio yield Interest income from portfolio / Average gross or net portfolio

Funding expense ratio Interests and fee expenses on funding liabilities / Average gross
portfolio
Financial Cost of funds ratio Interest expenses on funding liabilities / Period average funding
liabilities
Management
Current ratio Short term assets / Short term liabilities
Debt/Equity ratio Total liabilities / Equity
Capital adequacy ratio Total equity / Total assets

Average disbursed loan size Amount issued in the period / Number of issued loans
Outreach Average disbursed loan size on per- Average disbursed loan size / Per-capita GDP
capita GDP

Other definitions:
Funding liabilities: Liabilities that finance the loan portfolio and the cash investments necessary to manage the loan
portfolio
Operating expenses: Personnel expenses + Administrative expenses
Recovery from write-off ratio: Income from write-off (payments received from loan already written-off) / Average gross
portfolio
Net foreign currency position: Assets denominated in foreign currencies – Liabilities denominated in foreign currencies

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Annex 5. Guidelines of reporting and accounting

Financial statements
BosVita does not offer non-financial services. Its financial statements reflect only the results of
financial activities.
The external auditor of BosVita, Price Water House Coopers, makes several adjustments to the
financial statements of BosVita, including recalculation of portfolio and interest revenue based on a
declining interest rate basis.

Reporting
The Finance Department produces the following main financial and operating reports on a regular
basis:
- Balance sheet and income statement on a quarterly basis.
- Annual Narrative Report (general information about BosVita operations + portfolio data)
- Semi-annual Report for IRC.
- Monthly and quarterly portfolio report for ODRAZ.
- Portfolio and delinquency report (aggregate and disaggregated by loan officer) on a
monthly basis.

Loan loss provision and write-off

BOSVITA sets and reviews the loan loss reserve on a monthly basis. The following table shows
the provisioning policy:

The cost of the provision, which is included in the income statement, is the difference between the
loan loss reserve calculated at the beginning of the period and the loan loss reserve as it is at the
end of the period deducting the write–off.

Bad loans are written-off after all specific measures to recover have been exhausted and when
they are in arrear over 180 days. Loans that have been written off are tracked separately but
remain under the responsibility of the loan officer for its recovering.

Accrued interest
BosVita accrues interests on loans and it register them in the financial statements on a monthly
basis. The accrued interests are included in the income statement as an interest income and in the
balance sheet as an “Interest Receivable on loans”. BosVita do not stop to accrue interest on loans
when these loans become in arrears, but it do reserve for interests on the same method as for
principle.

Ratio of portfolio quality

BOSVITA reports data on portfolio at risk (PAR1) and arrears rate.
Portfolio at risk is calculated as the ratio of the outstanding balance of the loans past due out of the
total outstanding portfolio.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Restructured loans
BOSVITA doesn’t refinance loans. Loans can be rescheduled24 or restructured in rare cases when
there is an emergency (death, serious problems in business, health problems).
When the loan officer estimates that the client’s remaining debt should be restructured, he makes
the client fill up a written request for rescheduling. The request has then to be approved by the
Credit Committee (at headquarters).
Rescheduled loans are tracked separately, even if the MIS do not track rescheduled portfolio at
risk separately, and there is not a special provisioning policy.
The total amount rescheduled can not exceed 5% of the outstanding portfolio.
The rescheduled loan portfolio is as follow:

Insider loans
BOSVITA doesn’t provide loans to top managers, staff, neither to members of Board of Directors.

Donations
Donations for loan capital are registered in Balance Sheet.
Donations for operating expenses are registered as no operational income in the income
statement.
Donations for fixed assets are accounted for as deferred income in the Balance Sheet and
recognised as income on a systematic basis over the useful life of the related equipment.
Personnel in-kind subsidies are not registered in the official statements, but in the financial
statements for internal use BosVita makes adjustments, including in operating expense an
estimated value of the trainings and consultancies received.
The details of the donations are the following:

24
All the conditions are maintained a part from the final maturity date, that is postponed within one month.

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Details of liabilities
As of 31 December 2003, BosVita holds a soft loan from ODRAZ denominated in Euro and a
revolving funds from IRC that will become equity starting from June 2004.

Other accounting policy

The Finance Report is prepared on accrual basis.
Fixed assets are depreciated using the straight-line system, with the estimated useful life of each
class of asset as a basis.
BosVita, in accordance to the signed contract with ODRAZ, makes adjustments for inflation in its
financial statements.

Exchange rate variations and assets and liabilities denominated in foreign currency
All foreign currency transactions are adjusted at the end of the month and the gains/losses for
currency fluctuations are tracked in Extra Income/Expense.
Following a list showing assets and liabilities in hard currency as of December 2003:

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Microfinanza Rating Assessment of BosVita, Bosnia Herzegovina – February 2004

Annex 6. Rating Scale

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