Balkanalysis.com

By Daniel Doncev

Why do Macedonians prefer keeping their money in a mattress? And why do they write off the possibility of getting loans from banks? In this humorous but hard-hitting analysis, onetime Telecom director and former high VMRO-DPMNE official Dan Doncev sheds light on Macedonia’s financial policy flaws- and the illicit practices they have bred.

We thank the author for allowing us to reprint this article, which originally appeared in Skopje’s Fokus Magazine on 29 July.

A few months ago, one of my neighbors, who I am friends with, called me and asked if he could see me urgently. This man is what I consider to be a hardworking small business owner in Skopje, who has owned and ran his own businesses for over a decade. When I sat down with him that night he told me that he was in urgent need of 40,000 Euros in order to finance a new business which he had recently opened, and which was in addition to his existing business activities.He said that ideally he was looking to obtain the funds at an interest rate of 2.5% per month, but, if needed, was prepared to pay a maximum interest rate of 3% per month. He was prepared to give his car or apartment by way of a notarized agreement as a guarantee for the loan and then asked me if I knew someone whom might be willing to lend him the money.

Naturally my first question to him was had he tried to obtain a loan from one of the Banks. He said that he had dealings with Banks in the past, and it was such a bureaucratic hassle to go through the process, he did not have any good “connections” at any Bank, his profits over the last few years have not been so good, and this was a new business he was opening up which did not have “bonitet” (track record) and thus it was not worth his while to even try to obtain the loan from a Bank.

Following an hour-long discussion on this subject, I came to be surprised at the level of sophistication which obviously existed in this BLACK MARKET business of money lending in Macedonia. Whilst I knew that such a black market existed, I was not aware as to how easy and quick it is to obtain funds, provided you have adequate guarantees. These loans are always denominated in Euros, are payable back in Euros, and the interest rate charged is on the Euros.

My neighbor was prepared to pay 2.5% per month (that’s thirty percent per year) and he told me this is a good rate if you can get it. Most interest rates apparently begin at 3 percent and go all the way up to 5 percent per month.

So the next day I actually rang up some people whom I thought may know some of these lenders and asked if they could find someone who is prepared to lend money at 2.5 percent per month. The answer came back almost immediately that it would be impossible to even talk to someone about a rate below 3 percent per month and it was more likely to be higher.

Now think about that for a minute! The lending rates on most Euro denominated loans by Macedonian banks (if, of course, you can obtain one) is 10-15% per year. Compare this to interest rates in most countries in Western Europe which range from 4-7 percent per year. Or compare this to the United States, where a 30 year housing loan can be obtained at 5% per year.

Yet here we are in what is apparently a thriving black market in Macedonia, where loans are made on this market and the people that make these loans obtain excessively and absurdly high rates of interest.

There is an expression given to such lenders in the west – “Loan Sharks”. They will lend you the money, but if you don’t repay the loan and the high interest charge, you will get “eaten” by the shark in one way or another.

Yet, the tragedy in Macedonia is that honest, hardworking businessmen are prepared to take such loans because it appears there are few other alternatives to obtain loan capital. Furthermore, such loans promote a black market, which leads to lost tax revenues for the Government, and leave businessmen with little choice but to work in cash, which then further expands the black market, and forces people to break taxation and other laws. But businessmen make rational decisions, and a decision to borrow money from a loan shark at 30% a year can only be a rational decision, given the lack of other alternatives.

Apparently these loan sharks always take some sort of guarantees on the loans given. Most of the times the guarantee is a car, but it can also be an apartment. The guarantee is given in the form of a notarized agreement, acknowledging the amount of the loan, the interest rate, the repayment terms, and the guarantee.

To be sure, my neighbor has adequate guarantees for a 40,000 Euro loan. He lives and owns a new and modern 70 square meter apartment that would easily be worth 60,000 Euros. And it is LEGAL, that is, he has title from the Cadastre. But if he put it for sale for 40,000 Euros, then there is no doubt that it would sell, and sell quickly!

Now a quick analysis of the Balance Sheets of most of the Banks in Macedonia will show that they are actually not that short of money. This was not always the case over the last 15 years and the Banks did go through some incredibly difficult liquidity crisis in the 1990’s. But this is not the case today.

So why is it that a hardworking businessman, who is prepared to risk his HOME as a guarantee, cannot easily and quickly obtain a loan from the Banks?

One answer lies in the fact that the internal processes within the Banks are still unreformed. They simply have failed to adapt to the realities and needs of a market economy.

The second reason is that Banks are somewhat weary to lend when a home is the primary security. It is unfortunate that our legal system still carries over that old communist tradition of protecting the debtor and not the creditor. The process and speed at which a bank is able to posses a home which has been given as a guarantee for a loan in case of the loan not being repaid, and in the process by which the owner is essentially evicted, requires reform. This is a necessary reform if we are to have an efficient banking sector, but one which our laws and courts have failed to adapt, to this day.

But perhaps the most serious reason of all, and one which requires a completely separate analysis, is in fact the monetary policy of the National Bank of Macedonia. This is a long and complex problem, but insofar as it affects the amount of lending that banks give to small businesses (which we should not forget represents support for REAL economic activity) we can summarize it as follows:

Ever since the Denar was fixed to the Euro (or the Deutschemark before that), the policy of the National Bank has been to reduce and control inflation. As inflation has been low now for many years, we can say that this policy of the Bank has worked. But the price that has been paid by business as a result of this, has directly affected the level of lending made available by the Banks to medium and small businesses. By keeping what is clearly an economically unjustifiable rate of the Denar against the Euro (and this has become particularly visible over the last few years), the National Bank of Macedonia has essentially intervened in the market by either selling Euros to meet the demand, or, more commonly, by purchasing billions of Denars from the Banks in order to take those Denars out of circulation. This second category has been achieved through a mechanism whereby the National Bank issues central bank notes bearing a high rate of interest to the Commercial Banks in Macedonia.

Thus the activity explained above generates almost risk-free profits for the Banks of Macedonia, since they collect money from depositors, and place them at the National Bank at much higher rates of interest than what they pay on those same funds to the depositors. In other words, the Banks make big m
oney by simply placing their cash in a virtually risk-free form at the National Bank. But this money, which amounts to hundreds of millions of Euros, generates zero REAL economic value. That is, if the money had been lent to small or big businesses, instead of just kept at the National Bank, economic value would be created. As I said, this policy requires a complete and thorough analysis by itself, but it does go a long the way to explaining why small business owners find it so hard to obtain a loan from the Banks.

So medium and small businesses cannot obtain loans from Banks, the Banks are not playing the role they should be in being an essential source of capital to business, thus we have no economic growth and high unemployment and poverty. But at least the IMF can be happy with us, the Minister of Finance can tap himself on the back and everyone can be proud that we have enough foreign currency to repay our foreign debt as and when it becomes due. For in reality, this is the only effect that this policy has achieved.

Be that as it may, to get back to my neighbor, I encouraged him to nevertheless go and try to obtain the loan through the Banking Sector. I even set up some meetings for him with one of the larger banks in Macedonia. He did not succeed with this particular Bank. Apparently they could not give him a loan because he was starting up a new business, his existing business was small and did not have enough revenues – in other words, did not have ‘bonitet.’ The epilogue was that after 3 months of going though the process of trying to find a bank to lend him money, he was able to obtain the loan from Tutunska Banka at an interest rate of 11 percent per year. And I have to say here that, in my opinion, this Bank is probably and unfortunately the only bank in Macedonia that comes close to operating by the standards of Western banks, or at least tries to.

I realize that this example is a micro case. The reader may well ask what difference this example makes to the overall situation of our economy. The answer of course is that as a stand-alone case it makes absolutely no difference to the overall economy. But the point that we should not forget, is that the overall level of macro-economic activity is made up almost entirely of the individual economic activities which all of us as individuals undertake. This case, on its own may not make much difference, but if you consider that this example is but one of thousands and thousands of small business owners who have experienced the same problems and issues over the last fifteen years of transition, and, unlike my neighbor, most of them have not succeeded in obtaining loan capital, then the effects on the economy (or, unfortunately in Macedonia’s case, the lost opportunities to create new economic value) become almost impossible to calculate. But the results of such behavior by the banks are clear for all to see today!

We can only ponder why, after 15 years of transition, the Banks in Macedonia have failed to reform and to do what banks are supposed to do – earn the trust of the population, lend money, support business and by so doing, make profit for their shareholders. Or could it be perhaps that those who control the banks also control the black market for money lending?

Contact the author of this piece at: dan_doncev@ksg06.harvard.edu