Bosnia and Herzegovina: U-Plusu – An Innovative Approach to Hard Times
U-Plusu, a nonprofit, free, personal financial management counseling center, conducted a unique effort to provide debt mediation services and financial education opportunities.
Consumer protection and financial education are aimed at protecting customers before and during financial transactions. But what happens when borrowers get into trouble with debt?
Microcredit borrowers in Bosnia and Herzegovina were hit hard by an overheated and competitive local market during the global financial crisis. An innovative approach to personal financial management and debt counseling was initiated by three MFIs.
The idea of debt counseling or even seeking out a personal financial management professional is new in Bosnia and Herzegovina. People rely on friends and family, not professionals, for financial advice. But something had to be done to address the high level of over-indebtedness of many clients. A debt advisory center seemed a reasonable response to a sector in crisis, and a good alternative for people in trouble with credit.
The first debt counseling center was opened in Tuzla in September 2010 with IFC advisory services support and funding from EFSE.
Plus plans to (1) expand financial education with employees of private companies, state institutions, and schools, and (2) continue debt counseling and mediation services. After a difficult start, the program has been successful in helping people negotiate repayment plans with multiple financial institutions. Plus sees this service as an important contribution to society, the industry, and financial well-being of clients.
In addition, it will work on mechanisms for industry support. There is potential for financial service providers to contribute financial support, possibly by contributing to the government and for the government to support Plus, as is done in some countries. This mechanism fosters independence, reduces the perception of a conflict of interest, and allows FSPs to avoid the appearance of direct responsibility, especially if the contribution is mandatory. Plus is also investigating how debt counseling is supported in other countries.
IFC is also working with local government bodies, such as social work centers, municipalities, and free legal assistance offices to ensure that Plus’s learning is transferred to them when it comes to working with the overindebted clients. Training in a series to expand debt counseling outreach was planned for June 2013, with an IFC assessment to follow on the effectiveness of this approach as a potential transitional and exit process.
Future challenges include changing regulations around lending codes to compel over-indebted clients to interact with the FSPs and lenders to consider adjustments when clients are in difficulty (Bosnia and Herzegovina has no personal bankruptcy law) and working toward long-term change in societal attitudes and the debt stigma, which may prevent people from dealing effectively with debt. There is a need to communicate that preventing over-indebtedness and acting in a responsible manner when it happens are both important. Making the business case for financial education and appealing to lenders for support are also important.
Despite the challenges, Plus’s team of professionals has:
- Provided personal money management services to 2,528 adults and youth and provided specialized individual counseling to 955 individuals since its opening in 2010 in Tuzla and its expansion to Sarajevo;
- Engaged eight financial institutions to form a debt counseling steering group;
- Developed a client market segmentation matrix, core concepts for debt resolution and debt prioritization, and a common financial statement that better analyzes client disposable income; and,
- Joined the European Consumer Debt Network, a group of similar providers in the European Union.[i]
The center’s outreach services are growing, and innovative methods to reach targeted segments of the market are expanding. Plus staff works with schools, both students and teachers, and holds seminars for government employees.
As a result of Plus’s research, services are expanding to employees of large private companies. The supermarket chain Merkator and Sarajevo Gas Company were the first to respond. Plus research found that one of the main reasons people sought out counseling services was for repayment of loans for which they were guarantors. Because of their regular salaries, employees of private companies and government are regularly sought out as guarantors for loans. Companies such as Merkator and Sarajevo Gas have retained Plus to provide financial education to their employees on financial products, particularly credit contract clauses and household budgeting. Plus has held three workshops for 60 government employees in cooperation with municipalities in Sarajevo and Tuzla on the same topics.
Success Factors and Challenges
The center staff quickly learned a great deal about social and cultural norms, including misdirected ideas about responsibility and blame, and the stigma carried by indebted clients.
Social norms stigmatize people who carry debt beyond their means to repay. There is often little incentive to help anyone who is considered so irresponsible as to get into that situation. Research on the extent of debt and reasons for client indebtedness were keys to successful implementation. As a result Plus changed the marketing emphasis to focus on responsible personal financial management and financial education, even though debt counseling remains a centerpiece of the operation.
When people get into trouble with credit, there is often misguided behavior on both the borrower and lender side. As Plus explains, some clients don’t understand interest rates, and expect to repay only the principal. When they find that their debt includes accumulated interest payments, they may even become aggressive. Likewise, management is often unaware of the aggressive collections practices used by its staff. As Plus began to communicate with lenders about the problems clients face and the possibility of debt mediation measures, awareness was raised about sharing responsibility. Many FSPs also appreciated the unintentional “watch-dog” role played by Plus when investigating client complaints about aggressive collections behavior.
Some lenders did not want to participate in debt consolidation because they felt their own means of collection would be more effective. There is often little incentive to split the burden. Others lenders recognized that the debt burden was partly their responsibility, and a new repayment plan might make sense, particularly when multiple lenders were involved.
- Communicate with FSPs by understanding their behavior, incentive structure, and business norms.
- Ensure the communications and marketing package contains messages that bolster the reputation of an unpopular but important initiative.
- Research the causes of over-indebtedness to understand the problem and define a solution. Publicize findings and use them in communications with stakeholders who may have other views. Everyone supports having principles and practices to protect people who use financial services. Prevention is important, but having solutions for people in debt is equally important.