When Albania emerged as a multi-party democracy after decades of communist dictatorship, attempts to overcome problems of poverty and unemployment were hampered by a general lack of experience of private sector enterprise. Now, however, the economy is growing rapidly. Opportunity International, a microfinance organisation, together with Partneri Shqiptar ne Mikrokredi, its local partner, are supporting many small and medium-sized enterprises to become more sustainable and successful.
Albania – Background
Albania is a small mountainous country less than half the size of the Republic of Ireland. It is located on the Adriatic Sea and has land borders with Greece, Macedonia and the Federal Republic of Yugoslavia. The population is about 3.5 million. About 650,000 people live in the capital city of Tirana.? The other urban centres are small and only about 40 per cent of the population live in urban areas. This is in contrast with a population that is 70 to 90 per cent urban in most countries in Western Europe and 60 to 75 per cent urban for most countries of Eastern and South-eastern Europe.
In common with other countries in Eastern Europe that ousted communist dictatorships at around the same time, Albania became a multi-party democracy in 1990. Under the dictatorship of Enver Hoxha, Albania had become a closed and secretive country. Poverty, disrupted social ties and the virtual absence of any form of private enterprise were some of the legacies from this time.
Since the end of dictatorship Albania has experienced many of the problems associated with developing countries. These include a largely poor population predominantly engaged in small-scale agricultural activities, but hampered by the terrain, lack of improvements in production methods and risks of drought or floods. The unemployment rate is also high. The official rate is estimated at 17 per cent, though the true figure is likely to be significantly higher: 30 per cent of the population are estimated to live below the recognised poverty line, mainly because they are unemployed or underemployed, working in very low-paid jobs or attempting to farm on small and unproductive plots.
The economic development of Albania has also been hindered by the armed conflicts in nearby Kosovo, where many Albanians live, and in the former Yugoslav republic of Macedonia. (Macedonia became independent from Yugoslavia in 1991, but 25 per cent of the population of Macedonia is Albanian and in 2000 there was some unrest, with Albanians demanding autonomy in their own region.)
There have been other particular issues and problems that have affected economic development in Albania. Energy shortages have impeded industrial and small-scale business development.? Investment in the country was held back by a reputation for harbouring organised crime, especially drug trafficking, and because financial institutions in the country were seen as unreliable. About 70 per cent of Albanians lost their life savings in the 1990s in fraudulent pyramid investment schemes that collapsed. About 2000 people lost their lives in the unrest that followed this collapse. Many people of working age are now seeking work abroad, mainly in Western Europe, rather than taking their chance with the insecure and limited possibilities in Albania. In the year 2000 Albania received about US$315 million in development aid, most of it from Europe.
Despite these problems the Albanian economy is now one of the fastest growing in the world, with an annual growth rate of over 7 per cent. This is in part due to Albanians who are working in Western Europe and sending or taking money back into the country, but also to indigenous growth of industries, services and small enterprises. The continued growth of small and medium enterprises is considered to be particularly important for continued development in Albania and for the country to start to catch up with its neighbours.
Partners in the Microfinance Programme
Microfinance is the provision of small-scale loans, and savings and insurance services to the poorest level of entrepreneur whose business employs at most family members or a small group of people. It enables entrepreneurs to start, develop, diversify or expand their business.
In Albania a partnership between Opportunity International (OI) and Partneri Shqiptar ne Mikrokredi (PSHM), its local partner in Albania, has been at the forefront of a microfinance initiative that has now improved the position of nearly 5000 small and medium-sized businesses.
Opportunity International has provided loans and basic training to the poorest level of entrepreneurs throughout the world for more than 30 years. It has done this through developing partnerships with local organisations that provide basic financial?and support services for the businesses. It works through five support partners in? Australia, Canada, Germany, United Kingdom and the United States, and 41 implementing partners in 26 developing countries. Among these countries are Ghana, Peru, Uganda, the Philippines, Indonesia, India, East Timor, Colombia and Nicaragua. In 2003 OI made over 700,000 loans to almost 500,000 clients. This is estimated to have created nearly a million jobs. Loans totalled US$161 million, with average loan amounts of US$226. Women entrepreneurs were recipients of 87 per cent of the loans.
Most of the support to establish and expand OI’s Eastern European partners has come from its UK and US offices. The organisation has also invested significantly in small enterprises in Russia, Bulgaria, Macedonia, Serbia and Montenegro. In most former communist countries in Eastern Europe, financial institutions are still developing and many are not in a position to manage loans for small enterprises. OI fills this gap.
PSHM is the local partner of OI in Albania: OI acts as a donor; PSHM makes loans and provides support services to small enterprises. It has been operating since 1998 as a joint stock company, with OI as the majority shareholder. PSHM is now dealing with a client base of over 3,000 and an outstanding loan amount of over US$6 million. Loans have averaged about US$2,200 with maximum loan amounts of about US$25,000. However, in recent years it has developed a number of innovative loan products that can provide loans as low as US$70, so putting credit within the range of even the smallest-scale microentrepreneur or small farmer. PSHM has its main office in Tirana as well as nine other branch offices. It employs about 60 staff most commonly as loan officers who manage the individual accounts and repayments of clients.
The microcredit programme in Albania is supported by OI through grants from various donors including USAID and individual supporters.
Managing the Loans Better
PSHM found that, in its first years of development, managing the growing number and range of loans disbursed was one of its biggest challenges. There was a high staff turnover among the loan officers and problems with the computer programme running the loan accounts. Consequently it was difficult for loan officers to provide up-to-date information to its clients or to answer their questions fully.
This situation has improved significantly in recent years. The loan application process is relatively straightforward and loans are processed quickly. This improvement has been facilitated by better training of the loan officers, including the development of a training manual and better information sharing between the loan officers in the branch offices and the main office in Tirana. Loan officers have been better able to monitor loans, meaning that the branch or main offices can take action promptly if problems occur.? Write-off rates have been falling consistently. PSHM also has greater capacity for flexibility to reschedule and recover loans from businesses that run into problems rather than writing off these loans.
A development that will help the loan officers improve information access and sharing in particular is the acquisition of personal digital assistants (PDAs) provided by the Vodafone Group Foundation. The PDAs enable loan officers to download client information from the branch office computer, develop applications, make loan calculations and transfer the data to the branch office on the same day. Data is transferred by a fast and simple synchronisation process, whereas previously the loan officers made notes on paper that had to be taken to the branch office personally and the information then input onto the computer separately. This process could take a week or more. When the loan officers begin to use their PDAs regularly it is expected that they would save about 30 per cent of their time, which they would then be able to use to meet new clients and process new loans.
The Personal Digital Assistant
A PDA is a small hand-held digital computer. Its main features are a personal organiser and a communicator, but a range of software can be installed including for word processing, spreadsheets, email, internet browser, Geographical Positioning System, mobile phone and text messaging, etc. It can have a conventional operating system such as Microsoft Windows or one specifically designed for a particular type of PDA. As space limits the number of keys a PDA can have, most of the functions are activated by a touch screen facility. PDAs have only been introduced on the market recently and are still relatively expensive, typically costing around US$1,800. More basic models designed for a limited range of applications such as the one used by PSHM cost less than US$200.
Types of Businesses Served by PSHM and its Loan Products
PSHM provides loans for businesses in the sectors of production, transport and services, trade, and livestock and agriculture. This shows that many of the loans are used to set up or improve trading shops and stalls. The loans have mainly been used to provide working capital, funds to purchase machinery or equipment or for investment in a business.
There are four main types of client that PSHM loans have been aimed at:
- Group or solidarity enterprises;
- Solidarity enterprises in livestock;
- Microenterprises (very small) managed by individuals;
- Small and medium enterprises managed by individuals.
A new type of loan (CORE) has been developed and was introduced in 2003 to provide very small loans for the very smallest of microenterprises that previously were unable to borrow money from any official lending sources. These very small loans are, however, only offered at somewhat higher rates of interest than the other types of loans.
Depending on which of the above groups the particular loan is relevant to, PSHM have set different:
- Variations in repayment rate;
- Ranges of interest rates charged;
- Application fees;
- Ranges of amounts that are loaned;
- Periods of loan maturity;
- Repayment intervals;
- Grace periods until the first repayment becomes due;
- Requirements for guarantees or collateral.
Unleashing the Small Enterprise Potential in Albania
Almost all the businesses that have started in Albania since the end of communism have been in the micro, small or medium-scale categories. The extent of development of these types of enterprises is expected to have a critical bearing on economic development and the reduction of poverty in the future. There is a lot of potential, in particular, for the development of businesses based on the agricultural products and natural resources of the country; timber products, medicinal extracts and products from plants and herbs such as sage, for example. A significant proportion of such products could be exported and so earn valuable foreign exchange.
PSHM is expecting to have an important role in the development of micro, small and medium-scale enterprises in the future. By 2007 it is planning to have a client base of about 10,000. It is also establishing links with international and regional financial organisations such as the OPEC Fund and the Black Sea Trade and Development Bank, providing greater diversification from its current partnership largely with Opportunity International.
An assessment by an external agency rated PSHM with a score of A+ (between A and AA) based on an aggregation of its responses to:
- Its external operating environment;
- Quality of management and operation;
- Application of financial products and assets;
- Financial structure;
- Financial and operational results;
- Strategic objectives and future plans.
Potential scores range from AAA for on or close to 100 per cent on all of the above categories to D for consistently low scores. As part of its future development and to improve its long-term viability PSHM is planning to start a savings operation that would provide another source of funds for loans. However it is now quite challenging to set up a savings bank in Albania and PSHM would need to satisfy a number of criteria as the regulatory authorities seek to avoid the situation of earlier years that saw many savings and investment schemes collapse.
Other banks and financial institutions, such as the National Commercial Bank of Albania, are now showing increasing interest to lend to small and medium-scale enterprises. This would provide increased competition for PSHM in this sector, but with many more people wanting loans than the existing organisations can cover, this is unlikely to have much impact on PSHM.
The case study draws on articles by Opportunity International.
TVE/ITDG gratefully acknowledge support for Hands On programmes from the UK’s Department for International Development (DFID) and Vodafone Group Foundation.
Global Development Research Center – Virtual Library on Microcredit www.gdrc.org/icm
Opportunity International UK www.opportunity.org.uk
Books on microfinance available from ITDG Publishing:
Cloning Grameen Bank: Replicating a poverty reduction model in India, Nepal and Vietnam, Helen Todd (Ed.), 1996
Looking Beyond Credit: Business development services and the promotion of innovation among small producers, Jonathan Dawson & Andy Jeans,1997
Mapping the Shift in Business Development Services: Making markets work, Malcolm Harper & Jim Tanburn, 2004
Microfinance: Evolution, achievements and challenges, Malcolm Harper (Ed.), 2003
Partnership Financing for Small Enterprise: Some lessons from Islamic credit systems, Malcolm Harper, 1997
Practical Microfinance: A training manual, Malcolm Harper, 2003
Profit for the Poor: Cases in micro-finance, Malcolm Harper, 1998 & 2001
The New World of Microenterprise Finance: Building healthy financial institutions for the poor, Maria Otero & Elisabeth Ryne (Eds), 1994
Small Business in Transition Economies: Promoting enterprise in Central and Eastern Europe and the former Soviet Union, Jacob Levitsky (Ed.), 1996
ITDG Technical Briefs answers.practicalaction.org
Other Relevant Hands On Case Studies:
Get Mobile – Bangladesh
A Good Return – Uganda
Credit Projects in India: Maharahstra and Mewat
East Meets West – Poland
REED – Supporting Entrepreneurs to Develop Clean Energy Businesses
The Bamboo Business – Indonesia
What is a Revolving Fund