Credit Markets in Bulgaria: Meaning and Consequences of Greater Debt for Fewer People

A post about the discrepancies of the credit market in Bulgaria – specifically about the misuse of microcredit for consumption instead of investment.
By: Angelina Shtereva

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In the beginning of March 2017, the chairwoman of the Association of Collection Agencies in Bulgaria (AKAB) Rayna Mitkova announced that over the last year, fewer Bulgarians have borrowed, but loan amounts have increased by 22% on average. The article “Fewer Bulgarians Become Indebted, Debt Amount Grows” states that the decrease in borrowers may be a result of the improving economic conditions, however the average debtor is still a 30-year-old male with a temporary or a seasonal job, who borrows for consumption of luxury goods such as mobile phones, laptops, and TVs, according to the article. So, what are the implications of borrowing to satisfy the need for impulse purchases? Should this type of borrowing be automatically attached to the label of a “risky borrower”?

Is Saving Possible and is Working Worth It?

To answer these questions and understand the situation a little bit better, we must explore the socio-economic environment in which the average Bulgarian lives. As mentioned in “Industry in Bulgaria Has One of the Highest Profit Rates in Europe”, a Bulgarian pharmacist receives EUR 536 on average, while a Spanish counterpart gets about EUR 3480. Both countries are members of the European Union but choices for the Bulgarian are limited for financial reasons, even though the output supplied is higher in Bulgaria, according to the article.

With this tight budget constraint, the Bulgarian has very little disposable income left over after paying taxes and other expenses like rent/mortgage, car loans, food, and bills. This is why purchasing laptops and mobile phones is considered a luxury in Bulgaria and the average person needs to borrow in order to obtain what would be considered normal goods in other member states of the European Union. Looking at the general form of the consumer’s utility function in the two-period model, we notice something else.

u(c) + β(u(c’))

The discount factor, β, must be very close to zero because of impulse purchases of consumption goods in the current period. This indicates that Bulgarians on average value consumption today more than consumption tomorrow. The reasons for this preference may range from the uncertainty of the job market to a negative outlook for the future and mistrust of the government as seen in the protests of 2012 (Ivancheva). This may also be the reason why employment decreased by 10% between 2012 and 2016. The substitution effect leads us to think that the opportunity cost of employment is greater than that of leisure, meaning the same level of utility can be achieved by staying at home and not working. Without the right incentives from the government and the free markets, the Bulgarian consumer is caught in a vicious cycle of not being able to save due to an inadequate ratio of wages to prices, leading to more impulse borrowing for consumption. Since the consumer has to repay any borrowing today in the future period, financial stability decreases as time goes on.

Macroeconomic Effects on Microcredit

The situation is exacerbated in some areas by the consequences of the Great Recession in 2008. While 9 of the 28 regions in Bulgaria have reached and surpassed their GDP levels of 2008, all of these regions include big metropolitan areas where economic downturns have always been overcome more easily than in the rest of the country. According to “Bulgaria Overcomes Consequences of Economic Crisis Due To Fast Growth of 9 Regions” the wealth gap among different regions in Bulgaria is growing and the same trend is seen between wealth in Bulgaria and in Europe on average. Education and the labor market are hit especially hard by this disparity. With this in mind it is easier to understand why this macroeconomic situation forces more Bulgarians to move abroad, leading to a negative population growth and a stagnant economy in 19 out of 28 regions.

One of these 19 unsuccessful regions is the Northwestern region in Bulgaria, which is also the poorest one in Europe. Its largest city, Russe, also has the lowest amount of borrowers in the country. Could this be due to lack of education about the potential benefits of borrowing or due to the absence of microcredit in this more rural region? It is understandable that poorer people who knowingly borrow for consumption, often try to stay as far away from loans as possible. These people have to repay what they borrow with high interest rates, decreasing their financial freedom. On the other hand, lenders sometimes face adverse selection in these regions when giving out loans – they do not know if the borrower in front of them is “safe” or “risky”, leading to uncertainty of repayment. However, because some regions are knowingly poorer than others, meaning investment will be low regardless of number of loans given out, the lenders spike up the interest rates because of the high likelihood of borrowing for consumption and because of the generally non-entrepreneurial culture in Bulgaria. In this sense, almost all borrowers are seen as risky in some areas, which probably discourages the safe types from borrowing at least to some level.

Will There be an End to Risky Borrowing for Consumption?

So, overall can we really label all borrowing for consumption as “risky”? Could different approaches like group lending increase production and well-being in rural areas? The truth is that the asymmetries of the Bulgarian credit market are simply extensions of flaws in other areas. Based on my own knowledge of the political atmosphere in Bulgaria, I can safely say that the government rarely incentivizes domestic production, especially in the poorer regions. So even with the existence of microcredit, people might still be unwilling to take up the opportunity to invest in a small business or in agriculture.

However, even with so many roadblocks, I believe that at least the mindset of some Bulgarians is changing. There is a light at the end of the tunnel for those who have the option to borrow and the education and willingness to do so. According to “Fewer Bulgarians Become Indebted…” highly educated people have increased their borrowing over the past year. While the article does not go into detail as to why that might be, it may be safe to assume that at least a small fraction of these educated borrowers will invest the money in small or medium enterprises, giving a much needed boost to output and GDP.

Works Cited

“Bulgaria Overcomes Consequences of Economic Crisis Due To Fast Growth of 9 Regions.”Novinite.com – Sofia News Agency. Novinite JSC, 29 Nov. 2016. Web. 07 Apr. 2017.

“Fewer Bulgarians Become Indebted, Debt Amount Grows.” Novinite.com – Sofia News Agency. Novinite JSC, 14 Mar. 2017. Web. 07 Apr. 2017.

“Industry in Bulgaria Has One of the Highest Profit Rates in Europe.” Novinite.com – Sofia News Agency. Novinite JSC, 30 Mar. 2017. Web. 07 Apr. 2017.

Ivancheva, Mariya. “The Bulgarian Wave of Protests, 2012-2013.” CritCom. Council for European Studies, 7 Oct. 2013. Web. 11 Apr. 2017.

2 thoughts on “Credit Markets in Bulgaria: Meaning and Consequences of Greater Debt for Fewer People”

  1. Borrowing for consumption at typical MFI interest rates is just like using a credit card to purchase things you can’t afford. It may generate profits for lenders in the short term, but it’s dangerous for both lenders and borrowers. The situation in Greece is a good example.

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  2. The lack of information about borrowers is not good for credit markets and if interest rates are sky high, credit rationing may result as the safe borrowers drop out. Perhaps that is the reason less Bulgarians are taking out loans and not because of improving economic conditions.
    It sounds like the financial institutions in Bulgaria need some work, particularly in their screening of clients. Finding safer borrowers with higher quality projects are necessary to increase the country’s rate of growth.

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