Confrence Proceedings

First REDETE Conference

ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES:

A Review of Current Policy Approaches

CONFRENCE PROCEEDINGS

Banja Luka,

October 27-29, 2011

ISSN 2233-1034

International Conference

ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION

ECONOMIES: A Review of Current Policy Approaches

1st REDETE

2011

Publisher:Faculty of Economics, University of Banja Luka

Majke Jugovica 478 000 Banja Luka, RS, BiH

Phone: + 387 51 430 012Fax: + 387 51 430 053

For the Publisher:Novak Kondi, Dean

Managing Editors:Jovo Ateljevi,

Branka Zolak Poljaevi

Reviewers / Editorial Board:

Peter Rosa, UKAnna Rogut, Poland

Jelena Budak, CroatiaDarko Petkovi,BiHSaa Petkovi, BiH

Biljana Predi, SerbiaKiril Todorov, BulgariaNexhbi Veseli, FYRO

MacedoniaLjubinka Joksimovi, Serbia

Nikola Vukmirovi, BiH

Bojan Zeevi, SerbiaLjiljana Erakovi, NZ Vassilios Fouskas, UK

FriederikeWelter, Sweden Donato Iacobucci, Italy

Markus Kittler, UK Irena Ateljevi, Netherlands

Dejan Jovi, Croatia Marjan Svetlii, Slovenia

Tony ORourke, UK eljko Vako, BiH

Organizing Committee:

Jovo Ateljevi, ChairpersonBranka Zolak Poljaevi, Conference secretary

eljana JoviiJelena Roi

Marijana P. MiliMario MilanoviBojana PopoviDragana obot

Dragana DoenoviMilena Dobrnjac

Tatjana Vui Rogi

Typesetting:www.eradovi.com

Cover Design:www.eradovi.com

Economic Development and Entrepreneurship in Transition Economies:


First REDETE Conference

Proceedings:PDF on CD ROM with full papers

Edited by:Faculty of Economics, University of Banja Luka

Banja Luka, October 27-29, 2011

Copyright Faculty of Economics in Banja Luka, Banja Luka, 2011

All rights reserved.

No part of this publication may be reproduced, stored in retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Faculty of Economics, University of Banja Luka.

UDC 330.34(100)(063)

ISSN 2233-1034

First REDETE Conference Economic Development and Entrepreneurship in Transition Economies:


Under the support of:Government of Republic of Srpska

Minister of Science and TechnologyProfessor Jasmin Komi, PhD

Programme Committee:Jovo Ateljevi, Chairperson (RS-BiH)David Smallbone, Chairperson (UK)

Peter Rosa, UK

Anna Rogut, PolandJelena Budak, CroatiaDarko Petkovi,BiHSaa Petkovi, BiH

Biljana Predi, SerbiaKiril Todorov, BulgariaNexhbi Veseli, FYRO

MacedoniaLjubinka Joksimovi, Serbia

Nikola Vukmirovi, BiH

Bojan Zeevi, SerbiaLjiljana Erakovi, NZ Vassilios Fouskas, UK

FriederikeWelter, Sweden Donato Iacobucci, Italy

Markus Kittler, UK Irena Ateljevi, Netherlands

Dejan Jovi, Croatia Marjan Svetlii, Slovenia

Tony ORourke, UK eljko Vako, BiH

VII

CONTENTS

SPONSORS ............................................................................................................................................... XIIFORWARD ................................................................................................................................................ XIII

AGRICULTURE LENDING IN BOSNIA AND HERZEGOVINA - FROM THE EXPIRIENCE OF IFAD PROJECTS .............................................................................................................................. 1

ALEKSANDRA FIGUREK; HALIL OMANOVI; NATAA KOSI; ELJKO VAKO

OPPORTUNITIES FOR FINANCING THE SMALL AND MEDIUM SIZED BUSINESSES IN THE REPUBLIC OF MACEDONIA ............................................................................................... 12

FANKA RISTESKA; GORDANA VITANOVA; MARJAN ANGELESKI; TATJANA SPASESKA

MECHANISM OF FINANCING SMES IN SERBIA AS MID-TRANSITION ECONOMY .......... 20BRANKO Z. LJUTIC; IVANA B. LJUTIC ; PREDRAG MARJANOVIC

THE SME FINANCING GAP IN SLOVENIA: A MACROECONOMIC PERSPECTIVE ON A MICROECONOMIC SME FINANCING PROBLEM ....................................................................... 28

BARBARA MREC; MATEV RAKOVI

BUSINESS ANGELS: ISSUES, EVIDENCE, AND IMPLICATIONS FOR TRANSITION ECONOMIES ........................................................................................................................................... 43

CHRISTINE MITTER

BUSINESS ANGELS IN MACEDONIA ............................................................................................... 53ANGELINA TANEVA-VESHOSKA; LAZAR GJUROV; LJUBOMIR DRAKULEVSKI; SLAVICA TRAJKOVSKA

THE ROLE OF FINANCIAL SUPPORT FOR SME DEVELOPMENT IN REPUBLIC OF MACEDONIA .......................................................................................................................................... 60

ANETA RISTESKA; MIROSLAV GVEROSKI; STEVCO DIMESKI

THE HARMONIZATION OF ACCOUNTING REGULATIONS OF CROATIAN SMALL ENTERPRISES WITH ACCOUNTING REGULATIONS OF THE EU ......................................... 67

JASENKA BUBI; PETAR PEPUR

THE ORGANIZATION OF MANAGEMENT ACCOUNTING IN SLOVAKIAN SMALL AND MEDIUM SIZED ENTERPRISES ........................................................................................................ 73

STEFAN MAYR

DOING BUSINESS IN RUSSIA: LESSONS FOR MANAGEMENT ACCOUNTING ................... 81BIRGIT FELDBAUER-DURSTMUELLER; CHRISTINE MITTER; KSENIA KEPLINGER

FOSTERING ENTREPRENEURSHIP AND INNOVATIONS THROUGH THE INTERNATIONAL ACCOUNTING STANDARDS - RECOMMENDATIONS FOR SMEs AND POLICY MAKERS IN B&H ........................................................................................................ 90

DENIS TURKANOVI; NIKOLA VUKMIROVI

CORRUPTION AS AN OBSTACLE FOR DOING BUSINESS IN WESTERN BALKANS: A BUSINESS SECTOR PERSPECTIVE .................................................................................................. 95

EDO RAJH; JELENA BUDAK

THE IMPORTANCE OF CORRUPTION SUPPRESSION FOR APROACHING BOSNIA AND HERZEGOVINA TO EUROPEAN UNION ........................................................................................ 104

BRANKA TOPI-PAVKOVI; TAJANA SERDAR

LOCATING ENTREPRENEURIAL CREATIVITY AND KNOWLEDGE TO FOSTER GROWTH OF EUROPEAN CITIES .................................................................................................... 114

ARNIS SAUKA; EVGENII DAINOV

PART ONE: FINANCE, ACCOUNTING, CORRUPTION

PART TWO: ENTREPRENEURSHIP, INOVATION, CREATIVITY

VIII

A COMPARATIVE ANALYSIS OF THE NATIONAL INNOVATION PERFORMANCE: R.MACEDONIA AND SELECTED BALKAN COUNTRIES IN CONTEXT OF EUROPA 2020 STRATEGY .............................................................................................................................................. 124

SINIA CVETKOVI

INNOVATION AND ECONOMIC DEVELOPMENT CORRELATIONS AND CONDITIONS .......................................................................................................................................... 136

GADAF REXHEPI; SELAJDIN ABDULI; SHQIPE GERGURI; VELAND RAMADANI

ENTREPRENEURIAL PROPENSITY AS A GENERATOR OF TOURISM SUPPLY ................... 148TOMISLAV KLARIN

FACTORS CONTRIBUTING TO THE MOBILITY OF INTELLECTUAL CAPITAL EXAMPLE FROM BOSNIA AND HERZEGOVINA.......................................................................... 158

JOVO ATELJEVI; ZORAN CRNEVI

INNOVATION IN THE PUBLIC SECTOR THE WAY FORWARD FOR AN EFFECTIVE REFORM OF PUBLIC SECTOR MANAGEMENT IN BOSNIA AND HERZEGOVINA ............ 184

ILIJA STOJANOVI; JOVO ATELJEVI

ENTREPRENEURSHIP IN THE CREATIVE INDUSTRY ............................................................... 200BRANKO IRI; MARKO TRMI; SNEANA TRMI

DECREASE POVERTY THROUGH ENTREPRENEURSHIP PROMOTION AND COMMENCEMENT OF FAMILY BUSINESS .................................................................................... 212

MARINA RADOSAVLJEVIK BOJCEVA; ZORAN TEMELKOV

CHARACTERISTICS OF ENTREPRENEURIAL ACTIVITIES IN TRANSITIONAL COUNTRIES AND THEIR INFLUENCE ON DEVELOPMENT ..................................................... 219

BOJAN LEKOVI ; BOZIDAR LEKOVI ; SLOBODAN MARI

DEVELOPING MACEDONIAS ENTREPRENEURIAL CAPACITY: THE MISSING LINKS ........................................................................................................................... 232

BISERA GJOSEVSKA

DEVELOPMENT OF ENTREPRENEURSHIP AND GOING OUT FROM A VICIOUS CIRCLE OF POVERTY ......................................................................................................................... 241

ELA VUKMIROVI; NIKOLA VUKMIROVI

CONTEXTUAL INFLUENCE ON THE ENTREPRENEURSHIP POVERTY REDUCTION RELATIONSHIP IN NIGERIA: A MULTIVARIATE ANALYSIS .................................................... 247

YEKINI ELUJOBA

MANAGING INTERRELATIONS BETWEEN FAMILY AND BUSINESS .................................... 254EMIL PAPAZOV; ILIYA KEREZIEV; KIRIL TODOROV; KOSTADIN KOLAROV

FAMILY BUSINESS REPRESENTATIONS IN POPULAR CULTURE: THE CASE OF RUSSIA .......................................................................................................................... 264

BIRGIT FELDBAUER-DURSTMUELLER; KSENIA KEPLINGER

CHALLENGES AND PROBLEMS OF BUSINESS SUCCESSION IN BULGARIAN FAMILY FIRMS ...................................................................................................................................... 273

ASEN ASSENOV; ILIYA KEREZIEV; KIRIL TODOROV; YORDANKA IVANOVA

HOW TO EVALUATE THE IMPACT OF ACADEMIC SPIN-OFFS ON REGIONAL DEVELOPMENT .................................................................................................................................... 284

ALESSANDRA MICOZZI; DONATO IACOBUCCI

TRIGGERING INNOVATION IN THE RESEARCH COMMUNITY ............................................. 297ELIZABETA ZIRNSTEIN; MITJA RUZZIER; PETER FATUR

ENTREPRENEURIAL BEHAVIOUR AMONG STUDENTS CASE STUDY OF UNIVERSITY OF DONJA GORICA, PODGORICA, MONTENEGRO ......................................... 304

DRAGANA RADEVIC; SANDRA TINAJ

PART THREE: FAMILY BUSINESS, EDUCATION, CULTURE, GENDER

IX

WOMEN ENTREPRENEURSHIP IN A FASHION INDUSTRY ...................................................... 312DANIJELA PERKUI MALOK; KATJA RAKUI CVRTAK; SENKA BOROVAC ZEKAN

THE TESTING OF STRATEGIC MODEL OF POSITIONING OF A NEW PRODUCT OF A SMALL ENTERPRISE OF A COUNTRY IN TRANSITION ON THE GLOBAL MARKET .................................................................................................................................................. 322

IVANA ILI; NEVEN ERI; STJEPAN KALINI

PROCESS-ORIENTED ORGANIZATION OF PUBLIC UTILITY COMPANIES HAVE BETTER BUSINESS PERFORMANCE THAN FUNCTION ORIENTED ORGANIZATION .... 328

ANITA KROLO CRVELIN; IVAN PERONJA

STRATEGIC MANAGEMENT OF ENTREPRENEURIAL CULTURE.......................................... 333ANELIJA PLAVI; MILICA PAUNOVI

THE NETWORKING STRATEGIES CONTRIBUTION TO THE SMALL AND MEDIUM SIZED ENETERPRISES PERFORMANCES .................................................................................... 341

BILJANA PREDI; DANIJELA STOI

WORKING CONDITIONS AND EFFICIENCY IN MANUFACTIRING ENTERPRISES OF THE SPLIT-DALMATIA COUNTY (REPUBLIC OF CROATIA) ................................................... 357

MARIO BOGDANOVI; ELJKO MATELJAK

QUALITY OF MANAGEMENT AS A FACTOR OF FIRM MARKET EXIT IN DIFFERING MACROECONOMIC ENVIRONMENTS ........................................................................................... 373

KSENJA PUNIK; MAKS TAJNIKAR; NINA PONIKVAR; PETRA DOENOVI BONA

EVALUATING MERGERS AND ACQUISITIONS (M&A) AS A FORM OF COMPANY RESTRUCTURING ................................................................................................................................ 384

DRGN ILVNVI

COGNITIVE CAPITALISM AND CONTROL OF AN INCREASINGLY AUTONOMOUS LABOR FORCE IN ORGANIZATION ................................................................................................ 395

ALEKSANDAR KEELJEVI

THE PRODUCT MARK-BRAND AND ITS ASSESSMENT IN THE MACEDONIAN MARKET .................................................................................................................................................. 399

JUSUF ZEKIRI; NEXHBI VESELI

USING SOCIAL NETWORKS IN A SMALL BUSINESS ENTREPRENEURSHIP ....................... 414KATJA RAKUI CVRTAK; NEVEN ERI; SENKA BOROVAC ZEKAN

CUSTOMER SERVICE AS A FACTOR OF COMPETITIVENESS OF RETAIL COMPANIES ........................................................................................................................................... 422

JELENA CUGUROVI; KATARINA BORISAVLJEVI

THE ROLE OF BRANDING IN SMES: DIFFERENT PERSPECTIVE ON THE MARKET ...... 432FRANC VIDIC; JAKA VADNJAL

TECHNOLOGY AND INNOVATION DYNAMICS: MODEL FOR ECONOMIC DEVELOPMENT IN TRANSITION ECONOMIES ........................................................................... 441

TATJANA VUCIC ROGIC

IMPACT OF TRADE ON DEVELOPING COUNTRIES OF SOUTHEAST EUROPE ................. 453ALEKSANDAR IVKOVI; JELENA PETROVI; PERO PETROVI

GLOBALIZATION PROCESS AND THE IMPACT ON INEVESTMENT IN ALBANIA ............ 462IRMA SHYLE; JONIDA TETA

SOCIAL ENTREPRENEURSHIP IN POLANDS CENTRAL AND REGIONAL POLICY IN THE ASPECT OF FINANCIAL EFFECTIVENESS ..................................................................... 471

MARIAN OLISKI

PART FOUR: STRATEGIES AND BUSINESS DEVELOPMENT

PART FIVE: REGIONAL DEVELOPMENT, GOVERNMENT

XCOMPARATIVE ANALYSIS OF FACTORS FROM MARKETING AND LEGAL PERSPECTIVE AND POLICIES THAT AFECT SMES IN MACEDONIA AND EU .................... 477

BILJANA CONEVSKA; TAMARA JOVANOV MARJANOVA

STRATEGIC APPROACH TO PERIPHERAL AREAS DEVELOPMENT THROUGH SMALL BUSINESS ENTREPRENEURSHIP ...................................................................................... 490

BLAGOJ GORGIEVSKI

TRENDS IN PRODUCTION AND PROCESSING OF MEAT IN THE REPUBLIC OF SRPSKA .............................................................................................................. 499

ALEKSANDAR OSTOJI; GORDANA ROKVI; LJILJANA DRINI; NEBOJA NOVKOVI

INSTITUTIONAL SUPPORT FOR ENTREPRENEURSHIP AND SMEs DEVELOPMENT: AN EMPIRICAL STUDY ON REPUBLIC OF SRPSKA (BOSNIA AND HERZEGOVINA) ........ 506

SAA PETKOVI

THE CORRESPONDENCE OF PUBLIC POLICIES IN THE REPUBLIC OF MOLDOVA TO THE DEVELOPMENTAL NEEDS AND PROBLEMS OF SMEs .............................................. 528

ELENA ACULAI

COMMERCIAL DIPLOMACY IN PRACTICE: EXPERIENCES OF INTERNATIONAL BUSINESS EXECUTIVES AND RESPRESENTATIVES .................................................................. 537

HUUB J.M. RUL; SIRP DE BOER; WOUTER TEN HAAF

SHAPING THE PATH? LEARNING EFFECTS ON ENTERPRISE POLICY DEVELOPMENT IN POST-COMMUNIST ALBANIA ...................................................................... 547

MIRELA XHENETI

THE POSITIVE AND NEGATIVE ASPECTS OF FISCAL POLICY IN IMPROVING THE BUSINESS ENVIRONMENT ................................................................................................................ 561

STEVAN GABER

THE ROLE OF LOCAL GOVERNMENT IN ENHANCING ENTREPRENEURSHIP ON EXAMPLE OF POLISH TOWNS .................................................................................................. 568

EWA GLINSKA; TADEUSZ POPLAWSKI

IS CORPORATE SOCIAL RESPONSIBILITY THE WAY TO NON-PROFIT SECTOR SUSTAINABILITY? ................................................................................................................................ 579

JAROSLAVA NMCOV

MAPPING OF REGIONAL CLUSTERS IN SERBIA ........................................................................ 590DRAGIA MIJAI

AND SUPPORTING FACTORS FOR THE SME COMPETITIVENESS ........................................ 597KALOYAN GANEV ; RALITSA SIMEONOVA-GANEVA; ZHELYU VLADIMIROV

THE ANALYSIS OF KEY CHALLENGES AND CONSTRAINTS TO THE STABILITY AND GROWTH OF AN ENTREPRENEURIAL SECTOR IN SERBIA .................................................... 614

MAJA DJUKI-IVANOVIC; SUZANA STEFANOVIC; VESNA JANKOVIC-MILIC

BUSINESS DEVELOPMENT AND GROWTH DESPITE THE GLOBAL CRISIS: THE CASE OF CROATIAN SMALL COMPANY ............................................................................. 628

HELENA MIKAI; IVICA ROMAC; MARIJAN ZUJI; SENKA BOROVAC ZEKAN

SMES AS FACTOR OF ECONOMIC GROWTH IN BOSNIA AND HERZEGOVINA ................. 638IGOR IVKO; MILA GADI

POLISH PRESIDENCY IN THE EUROPEAN UNION IN THE CONTEXT OF THE EXPANSION OF UNION INT0 WEST BALKANS COUNTRIES - POLITICAL AND ECONOMIC ISSUES. ................................................................................................................... 646

MAGDALENA ICKIEWICZ-SAWICKA

PART SIX: GROWTH, EU FUNDING, FDI, TRANSITION INTERACTION OF LEADING

XI

THE IMPLICATIONS OF STRUCTURAL FUNDS IN REGIONAL DEVELOPMENT AND INCREASE WELFARE IN ROMANIA. CASE STUDY: GORJ COUNTY ..................................... 654

ENEA CONSTANTA; ENEA CONSTANTIN; STEGARTOIU CARINA

FOREIGN AID AND ECONOMIC DEVELOPMENT IN TRANSITION ECONOMIES VICIOUS CIRCLE VS. BETTER TARGETING .................................................... 666

VESNA PETROVI

FACTORS CONCERNING THE ECONOMIC GROWTH: HR DEVELOPMENT IN INSTITUTIONS THAT SUPPORT ENTREPRENEURSHIP ........................................................... 673

EMILIJA RISTOVA; HRISTINA SERAFIMOVSKA; LJUBICA STEFANOVSKA

THE LEGAL FRAMEWORK AND ITS INFLUENCE ON THE SCOPE AND THE STRUCTURE OF THE FDIS THE CASE OF THE R. OF MACEDONIA ................................... 680

MARGARITA MATLIEVSKA; PECE NEDANOVSKI; VLADIMIR MITREVSKI

FLEXICURITY IN TRANSITION: THE CASE OF COUNTRIES OF FORMER YUGOSLAVIA ......................................................................................................................................... 689

LAPOREK SUZANA; PRIMO DOLENC

TRENDS IN ENTREPRENEURIAL ACTIVITY IN CENTRAL AND EAST EUROPEAN TRANSITION ECONOMIES ................................................................................................................ 701

ANDR VAN STEL; JERZY CIELIK

WHY 20 YEARS AFTER TRANSITION THERE ARE NO LUXURIOUS GLOBAL BRANDS IN POLAND? COMPARISON WITH EMERGING MARKETS. ................................... 721

JOANNA RADZISZEWSKA

TWO WAYS OF TRANSITION COMPARISON OF THE ECONOMIC RESULTS ACHIEVED IN POLAND AND IN FORMER GERMAN DEMOCRATIC REPUBLIC ............... 733

KONRAD POPAWSKI

XII

Sponsors of the 1st REDETE Conference Economic Development and Entrepreneurship in Transition Economies:


Ministry of Science

and Technology

XIII

FORWARD

More than 20 years have passed since the collapse of the single-party socialist systems, suggesting that it is an appropriate time to review the state of play concerning entrepreneurship and economic development, and assess the extent to which current policies are appropriate to developing a sustainable SME sector and promoting entrepreneurship. In transition economies, the commanding ethos was to make the rapid transfer from a socialistic highly-controlled economic structure to a free-market structure. The problem is that economic development and real entrepreneurship have been stifled by the so-called free market almost as effectively as it had been by socialism. Many small enterprises were put out of business by large mostly foreign-owned conglomerates. State structures in transition economies have tended to take a bureaucratic approach to the problems associated with the SME sector. Due to a lack of systematic and fair transition in many of those economies, the gap between the rich and poor has widened significantly. The only exceptions have been countries such as Slovenia, which has tended to embrace a German/French social market model and return large sectors of important economic activity in public control, whilst ensuring a fairer division of wealth through a Scandinavian style tax and welfare system. Arguably, the theory of entrepreneurship has not hitherto, distinguished between entrepreneurs operating in different business environments or considered differences between entrepreneurship in wealthy and poor countries at various stages in economic history.

The opportunities for entrepreneurs in developing countries are broader in scope than in those in developed markets, yet developing country entrepreneurs face an increasing number of barriers to realise these opportunities. For example, entrepreneurs in emerging markets heavily rely on informal sources of finance to start-up their businesses, due to the lack of a regular supply of commercial loans. Statistical evidence suggests that about 90 percent of the people in developing countries lack access to financial services from institutions1. Financial markets in most of those countries are set up to maximise the profit in a short time where the lending cost normally exceeds profit margin of legitimate businesses. While entrepreneurial opportunities are broader and resultant strategies are naturally self-hedging in developing countries, limited personal and family savings and an absence of financial innovation severely limits the growth prospects of promising start-ups in developing countries. In this particular context, a number of questions arise such as how do we design markets for entrepreneurial finance in developing countries? How do we extend financial innovations such as hedging and insurance to entrepreneurs in developing countries, in ways that allow them to manage risk more effectively? How do we move away from a reliance on complex financial instruments to finance business activity, towards simpler and more basic credit/savings or other microfinance models?

Being part of the neo-liberal ideology, governments of many transitional countries have not done much to protect SMEs and entrepreneurs from Bretton Woodss institutions2 that contribute to the concentration of economic power in the hands of private capital, or more accurately, of financial capital. Public intervention and the support of entrepreneurial growth has been inconsistent and not always clearly focused. The managers of state SME development organisations are frequently bureaucrats with no solid understanding of the problems of the entrepreneur.

Another important and upcoming research theme within the fields of economic development and entrepreneurship is poverty and its reduction. According to a World Bank report from several years ago (2008), more than 1.4 billion people live in conditions of poverty in developing countries3, fact in a direct relationship with the problem of finance mentioned above. Even in the EU about 80 million people lived below the poverty threshold4. Poverty reduction is considered the first objective of the Millennium Development Goals. This is a good reason to believe that indigenous entrepreneurship can reduce the poverty in those countries. In the conference call we encouraged researchers to submit papers on this vital topic.

Empirical research conducted in transition economies shows that SME and entrepreneurship contribution to economic and social progress is affected by unstable environments and an institutional context that has yet to establish the framework conditions for sustainable private sector development. This is directly linked to deep-rooted and wide spread corruption in transitional countries, which is another legitimate concern for genuine entrepreneurs. Unequal processes of privatisation, increasing corruption and organised crime, have disrupted the transition towards a market economy. These processes have destroyed fair competition and the potential for a free and healthy private initiative. In the early stages of transition in particular, the new class of entrepreneurs that had emerged have had advantages related to the structural and institutional transformation of economies due to their previous managerial roles in former public enterprises and their governmental connections. Such

1 Robinson, Marguerite S., (2002). The Microfinance Revolution: Sustainable Finance for the Poor2 The World Bank and the International Monetary Fund, its sister organization, created at Bretton Woods New

Hampshire in 1944, are referred to as the Bretton Woods Institutions (BWIs).3 World Bank (2008). World Development indicators: Poverty data. Washington DC:4 Wolff, P. (2009). Population and Social Conditions. EUROSTAT, Statistics in focus 46/2009. Luxemburg: Office

for Official Publications of the European Communities.

XIV

an environment has created space for a large informal economy. Two political science scholars5 (Key Notes): were invited to the conference to address these problems from; a) the perspectives of transitional theory (used to help explain the context in the post communist countries including the Western Balkans) and, b) political economy (explains the link between the business and political elites) and the geneses of the most recent global economic and financial crises. The next REDETE conference will include more topics of this kind.

In order to better comprehend an increasing number of problems that face transitional economies, the rational to initiate this conference is well justified. Indeed, scholarly researches into topics implied by the Conference title are scarce. It is argued that entrepreneurship in developing countries is the most understudied important global economic phenomenon today. This was also clearly stressed by the Conference Key Notes

6 calling for

a more integrative research into both economic development and entrepreneurship.

We deliberately combine these two inseparable areas considering the fact that in many transitional countries clumsy economic reform and often irregular privatisation wiped out most of the manufacturing sector dominated by large firms. Entrepreneurship and SME development is seen as one of the key avenues for overall economic development. Development is explained either by increased inputs or by technological change which somehow happens out there, yet economists often ignore the role of the human agency or entrepreneurship.

Moreover, Porter states in a number of papers in the Harvard Business Review, that national prosperity is created, not inherited. It does not grow out of a countrys natural endowments, its labour pool, its interest rate, and its currency value as classical economists insist. Globalisation has wiped out these traditional advantages. The key factors of production today, which include technology, intellectual and financial capital, and managerial skill are not rooted in a nations soil but are eminently transportable across borders. The advent of the Internet has accelerated this process of freedom from national boundaries. All this applied to developing or countries in transition and, their economic prosperity will increasingly relay on entrepreneurship and innovation.

In general, the topic of this conference was closely related to the economic development and entrepreneurship in transitional countries, reflecting the new shifts that are becoming apparent in the economic system. Amongst other themes a high number of papers presented at the first REDETE conference were focused on the distinctiveness of entrepreneurship in developing and transition economies and the implications for policy development. Several papers critically analyze existing policy approaches and particularly those that involve elements of policy transfer. Financing entrepreneurial or small business activities is another important topic that has been well covered. One of the outstanding questions which this and future REDETE conferences seeks to address is: How do we best harness intellectual assets in a form of research that brings together theory and practice in a synergistic process? It is fair to say that for too long have we relied on theoretical modelling based on conceptualised data gathering, which we seek to turn into methodology that is then applied to real-world situations. We seek to challenge this philosophy.

Obviously the 1st REDETE conference did not address all the themes and issues mentioned above, nevertheless, we strongly believe that the papers that were reviewed, discussed and presented and at the opening conference - Economic Development And Entrepreneurship In Transition Economies: A Review Of Current Policy Approaches - in Banja Luka in October 2011 will increasingly contribute to our research development and knowledge through continued regular and constructive collaboration. We are proud to be able to attract young and less established researchers from transitional countries in particular, who require genuine help from experienced scholars to guide them through the publishing process. As we are very much committed to establishing a REDETE forum, we use this opportunity to invite you to the 2nd REDETE conference, which will be held in October2012.

London, Banja Luka, January, 2012

Programme Committee Chairpersons

Jovo Ateljevic & David Smallbone

5 Vassilios Fouskas (Richmond University, London -UK), Dejan Jovi (Univdersity of Zagreb, Croatia) 6 David Smallbone (Kingston University, UK), Peter Rosa (The University of Edinburgh, UK), Friederike Welter

(Jonkoping University, Sweden)

Part One:

Finance, Accounting, Corruption

1REDETE - ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP IN TRANSITION ECONOMIES

AGRICULTURE LENDING IN BOSNIA AND HERZEGOVINA - FROM THE EXPIRIENCE OF IFAD PROJECTS

eljko VakoUniversity of Banjaluka, Faculty of Agriculture

E-mail: [email protected]

Halil OmanoviUniversity of Sarajevo, Faculty of Food and Agriculture


Aleksandra FigurekUniversity of Banjaluka, Faculty of Agriculture


Nataa KosiMinistry of Agriculture, Forestry and Water Management of the Republc of Srpska

Agriculture Projects Coordination Unit, E-mail: [email protected]

Abstract

In the transition period agriculture in Bosnia and Herzegovina did not need to pass trough serious privatization, as in other socialist countries, but had a need for other types of reforms. Agricultural production in Bosnia and Herzegovina (BaH) has always been a subject of investment of private capital, but on the other side always faced with constraints in the form of lack of funds to finance development of that type of entrepreneurial activities. An important condition for ensuring the growth and development of agriculture is to provide a stable source of funding necessary for new investments, while credits has a crucial role. In this regard, significant is foreign aid which Bosnia and Herzegovina has received and receives from international donors and creditors, including the International Fund for Agricultural Development (IFAD). During the last fifteen years in Bosnia and Herzegovina IFAD designed, financed and supervised the implementation of five projects, the first starting from emergency and continuing with development projects. All these projects were related to establishing and expanding the modalities of financing and diversification of agricultural and other entrepreneurial activities in rural areas. Lending began with the distribution of credits in kind, continued with the awarding of cash credits through banks and MCOs and continued with the establishment of the first saving and credit associations in BaH. The first lending target group were only farmers and later it spread to SMEs, the first only livestock production and then also to all other entrepreneurial activity in rural areas. In the implementation of all IFAD credit lines in Bosnia and Herzegovina participated 25 financial institutions so far (15 banks, 7 MCOs and 3 SCOs) that extended about 16.000 credits to farmers and SMEs from the target group in the total amount of 67 million BAM. Based on case studies and lessons learned from implementation of these projects the paper describes modalities of lending activities and give some conclusions and recommendations that may be useful in planning and management of further agriculture development funding in Bosnia and Herzegovina, and in similar, less developed, countries.

Keywords: Agriculture, Lending, Bosnia and Herzegovina, IFAD


1. INTRODUCTIONAgriculture is the economic activity that plays a significant role in most developing countries in terms of its contribution to the creation of gross domestic product (GDP), employment, participation in foreign trade, etc. In developed countries, agriculture is less important in terms of the foregoing contributions, but it is becoming increasingly important in terms of sustainable management and protection of natural resources.

In BaH, a country in transition, agriculture plays both roles. Agriculture participates in the creation of GDP with 6.5% with a tendency to further decrease (GDP, 2010) 1; informally employed about 20% of the active labour force2, it is involved in foreign trade with 15% (analysis of foreign exchange of BaH, 2011)3. Agriculture is becoming increasingly important from the standpoint of rational and responsible use of agricultural land, groundwater protection and other issues of preserving the natural environment. If we want to ensure the development of agriculture and improve its competitiveness, there must be investments in agriculture vest. Majority production resources in agriculture in BaH have been and still are owned by small private sector. The majority of over 500,000 farms are not able to modernize and increase their production without new investment. Own funds of the farms as a source of financing investments, are insufficient and therefore the agricultural holdings, and other entities in agriculture (SC, Ltd, Coops) need funds necessary for accelerated development, which they borrow i.e. take credits. Agricultural credit is crucial for raising full potential of available natural resources in agricultural development. Share of agriculture in the total mass of credits in the RS and FBaH is low among banks (from 1.3 to 1.8%), and much more at MCO (33 to 36.5%) (Vuenovi & Vako, 2009).

Agriculture is often characterized as a high risk sector. Rural Finance Learning Centre lists several potential risks in agriculture: production and yield risk, price and market risk, lack of diversification, political risk (Bankakademie, 2011), which makes financial institutions reluctant to sell their free funds to this sector. Regardless of the number of projects, and governmental and other interventions, lack of credit is a problem of development, particularly of small agriculture in BaH.

Thus, the Agriculture Development Strategy of the Republic of Srpska until 2015 (adopted 2006) includes one of the measures for its implementation, which is providing farmers access to credit (including the establishment of a special Agricultural Bank) and establish a broader range of rural financial services (RS Agriculture Development Strategy, 2006). The Medium-Term Strategy of development of the agricultural sector in the Federation B&H also notes that the establishment of credit lines, which would be focused on agricultural production, are the needs that should not be questioned. It further argues credits for agricultural production with an interest rate not exceeding 3-5%, with long periods of investment lending, a special type of short term credits, including cooperatives and SCO in credits to agricultural producers (Medium Term Development Strategy of the agricultural sector in the Federation of BaH, 2006). And the World Bank, in its recent study on the state of agriculture in BaH noted that limited availability of credit remains a problem of agricultural development in BaH due to high interest rates, long procurement procedures and rigorous requirements for the provision of loan repayment (Agriculture Sector Policy Note for BaH, 2010).

With these facts, the International Fund for Agricultural Development (IFAD) faced, which came to BaH immediately after the last war with the aim and intention to help the poor population in rural areas to rehabilitate war damage by giving multiple contributions to the development of their agricultural production and improving living conditions within the framework of several projects that were implemented in BaH over the past fifteen years. Lending to agriculture was an integral part of all these projects, and in this paper it is all about lending to agriculture in BaH from the experience of IFAD projects. During the implementation of these projects there has been a shift from lending (only) to agriculture to rural financing that overlap each other, but certain elements are different (IFAD Decision Tools for Rural Finance, 2010).

1 According to thematic bulletin 01 Gross Domestic Product by Production Approach, 2000-2009, participation of agriculture in GDP in B&H in 2001 was 7.89%, in 2005 was 7.38% and in 2009 was 6.5%, Agency for Statistics of Bosnia and Herzegovina, Sarajevo, 2010, p. 26.

2 According to Labor Force Survey 2010 in 2008 it was 20.6%, in 2009 was 21.2% and in 2010 was 19.7%, Agency for Statistics of Bosnia and Herzegovina, Sarajevo, p. 37.

3 According to own calculations, based on analysis of data from the BaH foreign trade in 2010, the Ministry of Foreign Trade and Economic Relations, agricultural products classified in the tariff group 1-24 of harmonized customs tariffs have participated with 7.8% of total BaH exports, with 18.4% of total imports, accounted for 14.8% of total BaH foreign trade and 30% of its total foreign trade deficit.


2. MATERIAL AND METHOD OF WORKThe starting material for the research project are the data from the Project Units (Project Implementation Unit from the Federation of Bosnia and Herzegovina and Agriculture Projects Coordination Unit from the Republic of Srpska), progress or completion reports of certain projects, as well as personal experience some of the authors of this work, who participated in the implementation of IFAD projects in BaH. International Fund for Agricultural Development implemented the following projects in BaH and Herzegovina in the period 1998-2010:

Emergency Farm Reconstruction Project Restocking (EFRP);

Small Farm Reconstruction and Development Project (SFRDP);

Livestock and Rural Finance Development Project (LRFDP);

Rural Enterprise Enhancement Project (REEP);

Rural Livelihood Development Project (RLDP).

Besides the focus on information and documentation relevant to the implementation of these projects, there have been explored any other written and available sources on the topic of agriculture lending in BaH. Because of public-deficient knowledge of the role of IFAD projects in agriculture lending in BaH and poor written sources on the subject, authors have decided to summarize them and publish in this work with particular focus on lessons learned that can be used in planning and implementing similar interventions in developing countries such as BaH. The research hypothesis is - whether the modalities used in agricultural lending under IFAD projects in BaH can be successfully multiplied and used for the same purpose in other areas from other sources?

The subject of the research is agriculture lending in BaH, and as a research method, method of case studies of IFAD projects in BaH in the period 1996-2010 has been primarily used. During the research the other conventional scientific research methods were used such as the following: desk research, analysis, synthesis, comparison, methods of descriptive statistics, etc.

3. RESEARCH RESULTS AND DISCUSSION At the end of the nineties of last century, agriculture lending in BaH was a rarity. Most of the non-private banks were in extremely weak financial condition, while the small private banks were undercapitalized. Directed lending on a non-commercial basis still prevailed among state-owned banks. Accounting and regulatory standards did not conform to the needs of a market-based banking system (Bosnia and Herzegovina Post-Conflict Reconstruction and the Transition to a Market Economy, 2004). Besides not having enough long-term sources of financing in general, banks were not ready to lend to agriculture because of the high risks that this production carries with it, turning in a time to a favourable SME sector. SWOT and other analysis that were done for the agricultural sector at that time (and later) confirmed that lack of funds for investment and inaccessible and costly credits are one of the major constraints to growth and development of agricultural production in BaH. In a situation of lack of internal resources for financing, solution is sought (and found) in securing external resources (grants and loans) to credit domestic agriculture.

After the war, especially since the end of the nineties of last century, the microfinance sector in BaH has had impressive growth, which was significantly contributed by two projects funded by the World Bank (Local Initiative Project I and II). Most MFIs offer a similar range of loan products, essentially credits as they are not allowed to offer other financial services. Microfinance services, mainly credits, have reached a significant part of population (Planet Rating, 2011). On the role and achievements of microfinance in the development of BaH there are varying opinions, as the number and value of micro-credits grew steadily, but the indicators of growth and development of the sectors that are credited, were much weaker and showed slower progress, for example, as pointed by Betman (Welle-Strand at all, 2010). Some other studies have reached conclusions that could not clearly demonstrate the impact of micro credits on revenue growth of their customers, among other things because the majority of micro credits in BaH were used for employment or maintaining existing jobs, which is dominated by agricultural production.

Of course, that the pace of economic growth is affected by many factors, of which loans are just one of the necessary prerequisites. It is also true that in BaH after the war, much greater priority was given to social than economic objectives, i.e. that the micro finance balanced between the financial and


social objectives (Matul & Tsilikounas, 2004).

Numerous critics of lending by MCOs, particularly those who advocate for the interests of agriculture, in the first place put high interest rates that are charged by MCO and even today they charge the farmers. Therefore, donors, development agencies, government and individual ministries in various ways sought to provide better resources and conditions for lending to agriculture.

In this situation, the International Fund for Agricultural Development (IFAD) was one of the first international development organizations that begun working on solving this problem in BaH in an organized way. IFAD began operations in BaH in 1996 shortly after the conclusion of the Dayton Peace Accord. Since then IFAD has supported four projects in the country and provided a total of US$ 57.1 million in loans (www.operations.ifad.org). In its first two projects EFRP and SFRDP the lack of credits for the purchase of cattle was resolved by imports of livestock and distribution in the form of quasi (in kind) crdits. BaH transformed IFAD loan funds into livestock (mainly of imported origin) and thus urgently increased number of livestock destroyed during the war (Vako, 2000).4 These interventions were meaningful for that period because there was no time and other assumptions that livestock would gradually increase based on (only) reproduction and the number and genetic performance of, significantly destroyed, main herd. Farmers have not received the money, but cattle, i.e. credited in the amount of the purchase price of livestock.

The first Emergency Farm Reconstruction Project (EFRP) was implemented only in the Federation of BaH in the period 1996-97 and dealt with the renewal of the livestock on the basis of imports. Due to lack of data on the implementation of this project, only a conclusion that during two years, heifers imported in the value of 10 million BAM equivalent, which were distributed to 3,974 farms nearly in all municipalities in the Federation of BaH.

3. SMALL FARM RECONSTRUCTION PROJECTThe second one, Small Farm Reconstruction Project (SFRP) was implemented on the territory of both entities of BaH (Federation of BaH and the Republic of Srpska) in the period 1998-99. Under this project, farmers were granted over 8,000 credits in kind, mainly distribution of cattle (heifers, sheep and goats) in the total amount of about 24 million BAM, for a period of 5 years with a grace period of 12 months and an interest rate of only 2% (Table 1 in Appendix). In the absence of other means of ensuring repayment of the credit, guarantors were used, who were not employed persons, and they rather were farmers or neighbours of the borrowers. This mechanism of providing the credit repayment was simple and acceptable to debtors, but later proved to be unusable (possibility of collecting a debt from the guarantors were modest, although the majority of non-performing credits were never prosecuted).

This project had positive effects because it was helpful (the perception that it is aid and not a credit dominated!) to thousands of rural households out of which a large number used these credits properly and began the reconstruction of livestock that was destroyed by war. Rural households primarily increased production of milk and meat for their own consumption, and to a lesser extent and for the market. The consequences of genetic improvement through imported animals as well as examples of systematic rearing of offsprings of imported animals are still evident in BaH. However, implementation of this project faced with the following problems:

Imported heifers in their genetic and productive performance did not conform to local conditions of their housing and feed (it was very common that animals lost condition of the throat, significantly lower milk yields than expected, delays and lack of re pregnancy etc.);

Selection of beneficiaries was burdened with social criteria (favouring refugees, returnees, displaced persons, war invalids and the socially vulnerable groups, etc.), partly due to the conditions of IFAD project to support poor population groups;

Discontinuity of responsibility for the selection of credit beneficiaries (municipalities), extending the credits (government through the PIU/PCU) and collection of credit repayment (bank);

Broken market connections and the inability of the organized sale of milk and meat and the absence of project activities that would remove these restrictions, significantly reduced the opportunities to achieve some income;

4 For example: research was implemented in a limited area, Mrkonji Grad and other 6 municipalities, showed that war damage of cattle were 83%, sheep 81% and tractors 45%.


Part of the credit product was mandatory insurance of livestock against mortality (whose premiums were included in the credit amount) during the first year of holding, which has been extended by a very small number of beneficiaries (combined reasons for the absence of tradition of agricultural insurance and inertia of insurance companies);

Very low level of repayment of credits due to insufficient income (majority of animals were distributed based on the model of so-called. social package with a minimum number of livestock per household (in the Republic of Srpska even 93.9% of credits were granted on the model of one heifer-one household), lack of previous experience with the credit (SFRDP report, 2009)5 and the absence of political will to sanction this practice seriously.

Since it was practically an emergency one-year project (that was being extended for another year) there were not conducted any extensive study on effects and impacts of this project to its beneficiaries. Based on research conducted in late 2009 in the territory of the Republic of Srpska, 81.7% of beneficiaries have confirmed that livestock contributed to the recovery of their farms, but there was no detailed quantitative analysis.

4. LIVESTOCK AND RURAL FINANCE DEVELOPMENT PROJECTThe lessons IFAD has drawn from its country experience indicate that: (i) efforts to increase agricultural production and productivity, while essential, are not sufficient to reduce rural poverty unless there is an accessible market in which farmers can dispose of increased production at remunerative prices; and (ii) credit is needed to finance agricultural investment and value addition (B&H COSP, 2005).

Based on experience gained during the first two projects with the allocation of exclusive in kind credits, IFAD in collaboration with local governments, designed the new (third) Livestock and rural finance development project (LRFDP). Within this project, which was implemented in the period 2002 to 2008, there was a credit line designed for the purchase of livestock and agricultural machinery, which was implemented through the intermediaries, i.e. commercial banks (9) and micro-credit organizations (2). The goal was to replace the emergency (with dominant social objectives) focus of intervention and transfer it to sustainable agriculture as a stable (and very often only) source of income of rural households.This and all subsequent IFAD projects in BaH have been implemented on a selected area (limited number of municipalities that met certain criteria). The project, on a competitive basis made available funds to banks and MCOs from which financial intermediaries extended cash credits to the project target group. Beneficiaries of bank or MCO received the money and for that money buying cattle or agricultural equipment of their choice. This model was a significant improvement over the previous projects because banks were given full autonomy in terms of choosing borrowers and borrowers were given the freedom to choose subjects of lending. In this way, there was given almost 14 million BAM of credits for the 1,934 agricultural households and 6 million BAM to over 500 credits to SMEs and small family entrepreneurship (details in Table 1 in Appendix). This model of credits also had some limitations that are primarily manifested as:

The difficulty of finding guarantors (almost exclusive way the banks and MCOs insisted as guarantees for repayment of credits);

Poorer quality cattle, which was obtained mainly in the local market;

Lack of increase in livestock at the state level (because the same animals only changed owners through its purchase);

Expensive insurance of cattle purchased from the credit (which was not used for a long time due to high premiums charged by insurance companies).

Although financial institutions freely determined the level of interest rates, it was very good with the banks (5.75 to 9.95%). With 6.5% interest on an annual basis a five-year IFAD credits (lending conditions LRFDP project in the RS) were the most favourable credit conditions in the market of the Republic of Srpska. MCO for the same credits accounted slightly higher interest margin, which resulted that more credits were disbursed through banks than through the MCO.

The second contribution of the LRFDP project was the fact that it broke up the pre-assumption that farmers were not good and eligible beneficiaries of bank credits IFAD credit repayment at the time, that has never been below 95%, draw the way for many lines of credit that followed in the years

5 Only 7.9% of credit beneficiaries used some credit before.


from other projects sources, but also from own resources of banks. One of them was a World Bank project Small Scale Commercial Agricultural Development Project (SSCADP) which used similar model as LRFDP that introduced credit line for lending to agriculture (not only livestock but also fruit and vegetable crops) through the commercial banks and MCOs as intermediaries to Herzegovina region. The final report of this project noted that the credit subcomponent has substantially helped in increasing Bank and MCO willingness to lend to the agricultural sector. This is reflected in a fourfold increase of the portfolio of Nova Bank in the agricultural sector. Similarly, MCOs now deal with small farmers readily and these prove to be one of the most reliable segments of borrowers to make timely repayment of credits and that small farmers with a diversified production have a much lower risk than commercial banks estimate (SSCADP Completion Report, 2010).

Both in case of banks and MCOs guarantors were almost exclusively an instrument of security credits (2-3, depending on the size of the credit) that was difficult to provide in some less developed municipalities, but the number of cases where this instrument had to be used was sporadic, so that the guarantors were then much easier to find than in later years.

This project made many progresses in the field of agricultural lending: introduced healthy competition of more financial service providers for the same resources, did not limit the interest margin to providers, it expanded the list of agricultural activities eligible for credit and provided greater adaptability of credit conditions to the specific needs for individual groups of agricultural producers. Assistance in the dissemination of information and the first screening of potential borrowers, the project, using a network of farmers associations and cooperatives that it founded and with whom it worked, helped banks to better reach out the borrowers and to successfully complete the evaluation of their creditworthiness.The LRFDP completion report for part A (in FBaH) stated that real benefits of project credit line accrue from increases in livestock/rural enterprises production and productivity, incomes, employment and household food security (LRFDP Completion Report, Part A, 2008). The same report for part B (in RS) concluded that credits, especially in the very beginning of the project, was very important since those were the most favourable agricultural credits, and good terms and conditions encouraged a number of farmers to go into investments which they wouldnt have done without those credit funds (LRFDP Completion Report, Part B, 2008).

The second line of sub-credit was for SMEs but the interest in this kind of credits was much smaller because there were other available sources to meet similar needs (sometimes even under more favourable conditions) from the own resources of banks and other projects.

LRFDP project has had a breakthrough in the field of financial services, the establishment of the first Savings and Credit Organizations in BaH. The project has provided technical assistance in the adoption of the SCO Law in 2006 (only for the RS), and then the establishment of the first (and so far the only) three Savings and Credit Organizations in Berkovii, Srbac and Derventa, which were established in 2007. The idea was to mobilize the savings of the rural population and based on that collected deposits SCO would extend smaller amounts of credits and shorter repayment periods, with flexible guarantees to its members. The greatest improvement was made in SCO Hercegovina in Berkovici that started with initial 62 members and reached 246 members. So far it has approved 313 credits totalling 744,200 BAM, all exclusively for agricultural production. SCO Gradina Srbac was established by 30 members and currently the SCO has 72 members. This SCO meanwhile, has approved only 29 credits (larger amounts and longer repayment periods) and recorded an increased number of risky credits. The third SCO Agroinvest Derventa was established by 30 founders and it has increased to the current 89. So far, it has approved 156 credits amounting to 502,400 BAM

6. From

a four year distance of the first SCO in BiH, it could be concluded that this idea did not find a good ground, because SCOs in the meantime have not mobilized any savings, and their lending activities are solely based on its founders initial and subsequent credits approved by the project so that, by the way, their actions do not differ significantly from the MCO. Their assets are insufficient to cover their fixed costs, and no significant increase in its appearance.

6 Data have been updated as of 30.06.2011. and they have been taken out of internal data of Agriculture Projects Coordination Unit that monitors their performance.


5. RURAL ENTERPRISE ENHANCEMENT PROJECTModel of lending developed within LRFDP project continued in Rural Enterprise Enhancement Project (REEP). Number of eligible activities for credits has been expanded, so that apart for livestock, credits could be used for all other types of agricultural (especially fruit production) and non agricultural activities in rural areas. In this and in other projects, part of credit funds was intended to SMEs in sectors of agribusiness but number of used SME credits was below planned because in the same time, the same or similar credits were offered by almost all banks. Until mid 2011, 1,063 credits ere disbursed to individuals within this project in the value of 11.6 mil. BAM and 55 credits to SMEs in the value of 2.6 mil BAM (Table 1 in Appendix). Except enlargement purposes, other characteristics of these credits were mainly same as in previous project (repayment of 7 years, grace period up to 12 months for orchards up to 3 years, with interest rate from 6% to 10%).

The shift in REEP project was to spread a network of financial intermediaries because the loan agreements signed with the project were made by most banks and MCOs from both entities. This provides better geographical distribution of credits and a higher level of competition so that some banks and MCOs offered lower interest rates than their competitors, although the input conditions were the same for all agents.Farmers still have a need for additional resources that would fund their investments. In a survey of 1,390 rural households in 2008, which was conducted in 24 municipalities of the Republic of Srpska 72.4% of respondents said that the biggest obstacle to addressing their own business was shortage of funds (RS Strategic Plan of Rural Development, 2009). Lending is certainly one of the major sources of financing agricultural development, but according to the previously mentioned survey, less than 55% of households had never used credit, and 38% used some form of agricultural credits (10% for the purchase of cattle, 9.8% for raw materials, 8, 8% for purchases of machinery, 7.5% for the renovation of buildings and 1.7% for planting perennial plantations). Legal entities from the category of SMEs and cooperatives are in a somewhat more favourable position in terms of investment funding, because it is easier to obtain credits.

Regardless of whether the intermediaries in the lending were banks or micro credit organizations, the dominant instrument of ensuring repayment of credits were the guarantors. In terms of guarantors, MCOs were somewhat more flexible because they accepted and guarantors who have had informal sources of income, while the banks insisted on employed guarantors, preferably in the public sector. In addition to affirmative attitudes towards the IFAD credits, the problem of the impossibility of obtaining guarantors was one of the most common objections to the borrower, which is why the design of the next LRDP project introduced the possibility of their partial substitution mechanism of the guarantee fund, whose concept was elaborated in another paper by the same authors (Vako at all., 2009).

Monitoring of REPP credit beneficiaries performances in the RS REEP project area (sample of 86 farms) shows that in the years after using credits (2010) those farms increased their assets, agriculture machinery by 28%, and livestock between 18% (sows) and 40% (milking cows) comparing it with the level before credits (2008). In the same period, dairy farms that used credits increased their milk production by 51%, milk sale by 58% and income from milk by 48%, mainly thanks to increased number of cows and less to increase of milk yield. Borrowers from the category of meat producers increased meat production by 17%, meat sale by 19% and income from meat production by 39%. Borrowers from the category of fruit producers increased their fruit production and sale of the fruit equally by 56% and their income from fruit production 32%. Total household income of the farms which used credits increased by 24.6%, but their income only from agriculture by 43.6% because they used dominantly credits for agribusiness. Net farm profit increased by 22.6% comparing it with situation before agriculture production expansion financed by credits from REEP project (REEP M&E Report, 2011). This data uncontested shows that credit, if it is properly invested, can give significant benefit for borrower and ensure enough income for credit repayment.


6. RURAL LIVELIHOOD DEVELOPMENT PROJECTThe next project, Rural Livelihood Development Project (RLDP), which became effective in 2010, will continue the lending, but only in the FBaH. The reason is that, at the time the RS formed Investment Development Bank (IRB), in fact the Fund, whose credit potential has been around 600 million BAM, of which a considerable part was allocated to agriculture lending. During three years of its operation IRB has extended 808 of micro credit for agriculture in the total amount of 14.5 million BAM and 80 credits to SME in agribusiness sector totalling 51.6 million BAM (FAO B&H sector study reports, 2011). Comparing this line of credits, it can be concluded that it has many similarities with previous REEP, LRFDP lines of credit, except that the IRB limits the interest margin for the financial intermediaries (which affected less interest in MCOs to use this source of lending to agriculture). Because of the procedures necessary to meet the legal requirements to join OFID funds to already approved IFAD loan funds, the credit line under the RLDP has not become effective yet. Its results and achievements will be made in a few years time.

7. RURAL BUSINESS DEVELOPMENT PROJECTIFAD, governments, ministries and project units from both BaH entities (in 2011) have been preparing the latest project, Rural Business Development Project (RBDP), which in its design also has a dedicated credit line to support on and off farm businesses. Regardless of what the agriculture lending has become the practice of most financial institutions in BaH, it was stated that there is still a lack of long-term deposits and that agriculture is still underrepresented in the credit portfolio of most banks. Opening the door on lending to agricultural producers and rural population, it is envisaged that generally does not limit the activities, which would be eligible for financing as well as the number and types of financial intermediaries (banks, MCOs and SCOs) so that this line of credit has a more of rural finance, than the agriculture finance character.

8. CONCLUSIONInternational Fund for Agricultural Development (IFAD) has actively participated in the laying out, expansion and diversification of agricultural credit in Bosnia and Herzegovina with the (until now) 16,000 individual credits totalling 67 million BAM (excluding the effect of revolving). It began immediately after the war with the awarding the in kind credits, i.e. breeding animals, which was the beginning of the process of returning back the credit in the investment logic of the peasants, because, at that time, only donations were granted in BaH. On the other side, the banks (in the late nineties of the last century) were reluctant to credit farmers, so it was necessary to provide a dedicated (long-term) sources and create a special line of credit and credit products for certain types of agricultural production and a suitable investment. It continued with the awarding of cash credits for the purchase of livestock (dairy or breeding animals) approved by the several banks, and later several MCOs.

The highlight of the expansion of the number of intermediaries in lending has been the establishment of the first SCO, only in the RS (LRFDP project, 2002-08). The following IFAD Project (REEP, 2008-12) expanded the subject of credit to establish plantations of fruit, but the number of lending intermediaries was reduced to banks and MCOs. Recently, the latest effective IFAD project (RLDP, 2010-16) will continue to extend credit subject to virtually all types of agricultural production and related investments, and as intermediaries for distributing credit funds, all financial institutions that operate in the BaH market will be used.

IFAD projects have had a leadership role in finding the proper credit product for agricultural production and were the role model for other projects, including the financial institutions themselves that based on experiences of the implementation of IFAD credit lines, created and modified their own credit lines and products for agriculture.

Based on the experiences of five implemented IFAD projects in Bosnia and Herzegovina and related credit lines that were parts of these projects can be summarized as e follows:

In order to increase the size and scope of agricultural credits it has been important to provide a dedicated (long term) sources of financing;

To help the credits to reach specific target groups (women, poorer beneficiaries, remote areas, etc.) or types of investments, they should be favoured in the procedure for extending credits and sometimes even specifically targeted (principle of positive discrimination);

Credit products (according to purpose, amount, terms and conditions, etc.) should be tailored


according to the specific needs of agricultural production;

Borrowers should be allowed the freedom to choose the amount and terms of credits and give them freedom in the manner and conditions of supply that are subject of credit;

Proper guarantees securing the credit repayment are critical conditions for the use of credit by the majority of farmers (in which the MCO are much more flexible than the banks) and continuously look for alternative mechanisms for the elimination of bottlenecks;

The interest rate isnt a crucial prerequisite for a decision on the use of credit, but the interest rate still remains a significant psychological barrier for a decision on the use of credit, and

On the contrary to the prejudices, the repayment of credits given to farmers was regular, with lower levels of delinquency than some other categories of borrowers with stable and secure sources of generating revenue.

The need for agriculture lending in BaH will increase in the future, bearing in mind the necessity for its rapid modernization in the context of meeting the requirements in the EU agenda. It is expected that the financial institutions will still diversify their credit offers for agriculture and that the need for the provision of external resources for these purposes will stop in the near future. We should not ignore the progressive role of IFAD and other development projects in Bosnia and Herzegovina, which they played in breaking down prejudices about the high risk of lending to agriculture, and in adjusting credit conditions to the specific needs of certain types of agricultural production.

Experience from Bosnia and Herzegovina in strengthening funds for lending to agriculture (such as into IFAD projects) and finding the most suitable credit products can be useful multiply and applicable for other countries with similar situation and development level.

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Welle-Strand Anne, Kjllesdal K., Sitter N., Assessing Microfinance, The BiH and Herzegovina Case (2010), Managing Global Transition 8 (2), pp. 145-166.

Table 1. IFAD credit lines in BaH in the period from 1996-2010

EFRP SFRP LRFDP REEP Total

(1996-97) (1998-2000) (2002-08) (2006-10) (1996-2010)

Farmers Credits through Commercial Banks

Number of banks 0 0 9 6 15

Amount of ex-tended credit (mil. KM)

9,733,958 23,687,194 10,263,555 1,035,800 44,720,507

Number of credits 3,974 8,293 1,748 163 14,178

Repayment period 5 years 5 years Up to 5 years Up to5 years

Grace period 12 months 6-12 months 6-12 months 12-18 months

Interest rate (an-nual nominal) 2% 2% 5,75%-9,95% 8,39%-8,70%

Farmers Credits through MCOs

Number of MCOs 0 0 2 5 7

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0 0 3,344,850 10,550,240 13,895,090

Number of credits 0 0 186 900 1,086

Repayment period 3-5 years do 5 years

Grace period Up to 12 months Up to 18 months

Interest rate (an-nual nominal) 13%-18% 8%-18%

SME Credits through Commercial Banks

Number of banks 0 0 8 6 14


0 0 5,066,012 2,205,201 7,271,213

Number of credits 0 0 107 26 133

Repayment period Up to 5 years Up to 7 years

Grace period 12-18 months 12-24 months

Interest rate (an-nual nominal) 5,72%-6,32% 8,34%-8,70%

SME Credits through MCOs

Number of MCOs 0 0 2 5 7


0 0 1,061,800 437,500 1,499,300

Number of credits 0 0 422 29 451

Repayment period 3-5 years Up to 7 years

Grace period Up to 12 months Up to 24 months

Interest rate (an-nual nominal) 13-18% 8,23%-12,50%

Source: Internal data by Project Units (PCU/APCU)

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OPPORTUNITIES FOR FINANCING THE SMALL AND MEDIUM SIZED BUSINESSES IN THE REPUBLIC OF MACEDONIA

Gordana VitanovaFaculty of Economics Prilep, Macedonia


Marjan AngeleskiFaculty of Economics Prilep, Macedonia


Tatjana SpaseskaFaculty of Economics Prilep, Macedonia


Fanka RisteskaFaculty of Economics Prilep, Macedonia


Abstract

Small and medium-sized businesses are major part of the economy. The effective financing of such businesses makes a significant contribution to the economic growth and development. There are different types of financing the small and medium-sized businesses: internal funds; overdrafts and bank loans; leasing and hire purchase arrangements; stock market equity and corporate bond issues; venture capital or private equity; asset-based finance such as factoring and invoice discounting and trade finance. The capital market is alternative and competitive way of financing the business entities regarding the financial institutions, above all the banks. In the developed market economies the capital market allows the business entities to obtain the financial assets they need to realize their projects through issuing long-term securities. Considering the wide advantages these forms of financing offer, the subject of research of this paper shall be the opportunities of their implementation in the small and medium-sized businesses. Namely, an analysis and empirical research shall be conveyed of the current conditions of the small and medium-sized businesses related to their financing. In addition, recommendations shall be proposed for more efficient exploitation of the opportunities for financing on the capital market.

Keywords: Financing, Capital Market,Long-term securities, SMEs

1. INTRODUCTIONThe funding of business entities is a very important and complex process, which consists of planning, acquiring and use of the necessary financial resources for the current and developmental operation. The business entities can provide the necessary funds for investment projects realisation through internal and external sources. Internal funding provides greater autonomy, sovereignty and freedom during the financial decision making. However, quite often, business entities are unable to meet their need for capital only from internal financial sources, and therefore there is a need to acquire capital from external sources. In the developed market economies, the capital market gives an opportunity to economic entities to use different forms of funding. The efficient capital market enables acquiring of the necessary finances through: long-term investment loans, issuance of securities shares and bonds; as well as use of different derivative financial instruments.

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2. SIGNIFICANT FACTORS TO CONSIDER WHEN CHOOSING THE SOURCE OF FUNDINGThe economic entities in the developed market economies have an option to choose the source from which to obtain the necessary capital. The choice between the equity or debt capital for business needs funding is a complex and complicated process. It is of utmost importance that they resolve certain issues through a detailed analysis, before they decide on how they will provide the necessary capital, whether by loans or by issuance of securities, primarily because the capital secured by an issuance of shares has a proprietary nature, and the capital secured by an issuance of bonds or loans has a debt nature. The reasons and motives for an economic entity on the capital market to find itself in a role of a user of equity or a debt capital are multiple and varied. The practice shows that the most important between them are the following:

Maintaining an optimal balance between the equity and the borrowed (foreign) capital. Namely, these particular relations are basic indicators for the financial power and strength of the business entity, its creditworthiness, rating and business perspective. These parameters, as well as the relations between them, on the other hand, enable us to determine the place and the role of the economic entity on the capital market;

The degree of indebtedness of the business entity. This indicator has an utmost importance in most cases when deciding on how to provide the needed capital. Namely, if the business entity is considerably indebted or approaches the limit of allowed debt, it does not have a choice, but to provide the necessary capital through issuance of shares;

The degree of development and independence is also very significant factor that has to be considered. In a situation when the business entity has a successful and stable development, it is logical to decide on mobilization of debt capital, for a simple reason that this will allow it to maintain the high degree of independence and business autonomy in the future as well, which is a very significant prerequisite for maintaining the competitive advantage on the market in sharp economic conditions;

The degree of risk of the investment capital for which the mobilization of financial resources is made. If the risk of the investment of the potentially mobilized capital is higher, the economic entity will give a priority to the issuance of shares, while on the other hand, if the risk is lower, then it will decide upon debt capital;

Current conditions on the capital market according to which an equity or debt capital can be acquired;

The market price of own shares (in case of joint stoke company). If the current, market price of the shares is high and significantly exceeds their nominal value and there is interest for the shares among potential investors, it is realistic to assume that the necessary capital will be obtained through an issuance of shares because they are expected to be attractive on the market;

The interest rate on the long-term loans granted from the banking institutions. In conditions of low-interest rates and a stable bank loan policy, the economic entities will decide to obtain the necessary funds by taking long-term loans from the banks;

Tax policy and its instruments have a major impact on the decision to select the source that will provide the necessary funds. In situations when by tax deductions and benefits, bonds are being favoured, it is assumed that the economic entity will obtain the necessary capital by issuance of bonds. In cases when these tax deductions apply to the shares, the economic entity will perform mobilization of capital through issuance of shares.

Given all these factors when choosing one of the capital sources, the business entities should always consider the following:

If they decide to provide the necessary capital through an issuance of bonds, then the ownership structure of the capital will shift in favour of equity capital; and

If they decide to provide the necessary capital through an issuance of bonds or by loans, then the ownership structure of the capital will shift in favour of debt capital.

It is necessary to emphasize that there is no universal combination that can be used by all business entities in mobilization of the needed financial resources, and that is why before making a decision they should always make a detailed analysis of all the factors in order to choose the combination that will allow to maximize the value of the entity and minimize the costs for the capital.

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3. EXTERNAL SOURCES OF FUNDINGThe capital market is a very important segment of the financial market, mainly because on this market the business entities can obtain the necessary capital through loans from banking institutions or through issuance of securities.Companies that provide the necessary capital by using long-term loans need to make profit from the invested capital that can not be lower than the loan interest, because the interest is the price of the capital. For a business entity to be able to get a loan, it is necessary for it to meet the following conditions:

To be solvent;

To use the granted loan for its purpose;

To meet certain requirements stipulated by the loan.

Almost always there are restrictive provisions in the loan agreements among which these are more significant:

The loan user needs to maintain a minimal level of net working capital, as a condition for providing of liquidity of the company;

Restrictions in terms of expropriation of permanent assets;

Restrictions on further long-term borrowing;

Restrictions on status changes and significant changes in its organisation;

Restrictions on the amount of the issuance of securities, for the protection of creditors;

Restrictions on dividend payment to a certain percentage of the profits.

The developed capital market allows business entities to get the needed capital by issuance of long-term securities, shares or bonds. Before they issue securities, it is necessary for the business entities to obtain permission for the issuance by a competent state authority, mainly by the Committee for Securities. This permit is required in order to protect the interest of potential investors and to allow issue only to those business entities that have good creditworthiness and high rating.

Funding of the business entities through issuance of shares has range of benefits for the business entities including:

This source of funding puts smallest pressure on the company, because the mobilized funds can be used permanently, and the dividend payment to the shareholders is made by an internal decision of the administrative bodies;

The dividend doesnt have to be paid, and the unpaid dividend may be transformed into dividend shares;

It increases the companys ability to mobilize funds from foreign sources.

Apart from the advantages, this source also has disadvantages i.e. issuance of common shares creates an opportunity to change the power structure because of the inclusion of new shareholders i.e. change in the ownership and executive structure. Also, this method of obtaining capital is followed by expenses for the issuance and selling of the shares.

On the efficient capital market, business entities can obtain the necessary capital through an issuance of corporate bonds. This kind of mobilization has range of benefits among which the most significant are the following:

The ability to mobilize higher amounts of funds, because the bonds are being sold to a large number of interested subjects;

Capital is being mobilized without changing of the structure of the equity;

The costs related to the debt are restricted i.e. the only expense is the interest, which the issuer has to pay to the bond holders;

Because the interest payment is an expense, it can create some savings for the business entity when paying the income tax.

Insertion of a clause for early redemption of bonds if a cheaper source of funding becomes available allows flexibility in the financial structure.

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As disadvantages of the funding through issuance of bonds, the following can be mentioned: the interest is a fixed cost that has to be compensated regardless of the results achieved, and if the business entity makes a negative financial result and is not able to pay the interest; its survival may be jeopardized. As another disadvantage, it can be mentioned that the loan agreement might make provision for certain restrictions for the issuer, such as ban on alienation of property, ban on additional issuance of securities, ban on payment of dividend over some specified amount (if the issuer is a joint stock company) etc.

In the structure of capital sources of the business entities in the developed market economies, bonds take the dominant part, followed by shares, than long-term loans.

4. FINANCING OF BUSINESS ENTITIES IN THE REPUBLIC OF MACEDONIARepublic of Macedonia is a small country with total area of 25,173 km2, with population of 2,052,772 inhabitants of whom 953,200 are capable of working, and gross domestic product amounting to 410,744 million denars. This country size determines the market. Macedonia is still underdeveloped country and is at the lowest level of the medium-developed countries. Macedonian economy is nearly two decades in stagnation as a result of which the unemployment rate is 32.1% and is the highest in relation to neighboring countries.

According to statistics1 in the year 2010 in the country operate 75,497 businesses, from that 28,326

in the wholesale and retail, 8263 in manufacturing industry, in transport and communications activity 6417, scientific and technical activities 5228, building 4368, 3083 in agriculture, mining industry 164, administrative and catering services 2519, in rental real estate 415, housing and service providers 4433, health services 3166, professional, financial and insurance activities 408, education 992. Most of these businesses or 59,276 (78.5%) are with a very small number of employees i.e. 1-9 employees and only 203 entities (0.3%) have over 250 employees.

Most businesses that exist in the Republic of Macedonia are registered as limited liability companies (LLC and Ltd.) while as joint stock companies exist 700 entities from which in 2010 only 33 companies are listed on the Macedonian Stock Exchange.Capacity utilization in the enterprises in recent years has ranged from 52-62%. There are more reasons for such low utilization percentage, but these are noted as most important: financial problems, insufficient domestic demand, slow conquest of foreign markets, competitive imports, uncertain economic environment.Businesses in the Republic of Macedonia have still most of their investment projects financed with funds provided through expensive bank loans which certainly adversely affects their long-term financial balance and the capital structure. The maturity of the corporate sector indebtedness in the country can be seen from the following table2

Confrence Proceedings

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