As with many countries in the region, the real estate bubble that burst in 2008 exposed longstanding weaknesses in the Montenegrin financial sector and left a laundry list of obstacles for the country to overcome in its wake. These obstacles have become major inhibitors of credit access in Montenegro.
As is often the case, small and medium-sized enterprises have been hit particularly hard by this credit squeeze. Fortunately, the international community has stepped in to improve short-term credit access in Montenegro in the short term while the Montenegrin financial sector modernizes for the long term.
Prior to 2008, the Montenegrin financial sector was plagued by poor governance, little oversight and inadequate and outdated financial infrastructure. In the wake of the crisis, key stakeholders have been working to rectify these problems against a backdrop of ongoing deleveraging. While these changes were needed, this restructuring has left Montenegrin banks incapable of meeting the demand for credit.
Business owners who can secure loans from Montenegrin banks complain of high interest rates, extensive collateral requirements and overall a very risk-averse lending policy. For many business owners, securing a loan from a Montenegrin bank is simply not an option. This gap between supply and demand is being filled in two different ways: by the informal economy and by international actors.
Many would-be business owners (and individuals) have turned to the informal economy to meet their financing needs. This often entails borrowing under the table from loan sharks. Not only does this open borrowers up to unnecessary risk, but it also presents an obstacle to modernizing the financial sector.
The other option is to secure financing from international actors. Many organizations are working to provide improved credit access in Montenegro while the country’s financial sector gets back on its feet. These include the EBRD, the Investment-Development Fund of Montenegro, internationally-backed microfinancing institutions and other international organizations that have stepped in in a microfinance capacity.
There are signs that positive change is coming. In late 2017, the government passed a law aimed at comprehensively reforming the financial sector and improving credit access in Montenegro. The law creates new financial instruments available to business owners and opens up new opportunities for those struggling to secure a loan to avail themselves of financing and guarantees from the government.
The law also updates the regulations that govern the Montenegrin financial industry and help to bring Montenegro into line with international best practices. It is hoped that these laws will help to prevent another disaster like 2008 and ensure that credit access in Montenegro will not be affected by the next economic downturn. This legislation serves to prove that developing economies often need just a little bit of international support while they work to modernize their financial infrastructure, and that this support enables them to create improved frameworks that provide greater confidence moving forward.
– Michaela Downey