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SARAJEVO (Reuters) - When Alma, a Bosnian single mother of two, agreed to act as a loan guarantor for a colleague, she never imagined the day would come when she would actually have to pay the debt.
Yet that is exactly what happened to the Sarajevo high school administrator who is among an estimated 100,000 Bosnians paying off loans they secured for friends and relatives to help them rebuild their lives after the devastating 1992-95 war.
"I am paying off a loan of an ex-colleague who has left the job and I don't even see anymore," said Alma, 52, who was too ashamed to give her family name.
"If only there was an end to this nightmare," she added. Alma rented her apartment for extra cash as two-thirds of her 400 euro ($567) salary goes to cover loans.
In the states created after the collapse of Yugoslavia in the 1990s, people readily guaranteed loans for friends or relatives, unaware their backing was no longer a mere formality as during socialist times.
Now, the generosity that helped revive the Balkan country after Europe's worst fighting since World War Two is stinging guarantors as they themselves face the impact of the global economic crisis.
Back then, jobs were secure until retirement and the dinar currency suffered frequent denomination, making loan servicing an easy task. Also, with little private property, guarantors were a key backing mechanism.
While officials say overall indebtedness in Bosnia is relatively low compared with other Balkan countries, financial crisis-induced losses in its microcredit sector could bring poverty to the middle and working class people heavily dependent on such loans. That in turn could add to instability in the ethnically divided country.
"Before, we did not have massive lay offs and poverty such as today," said Milan Seselj, an executive in the microcredit sector where loans are exclusively guarantee-backed.
His firm, Sarajevo-based Sunrise, will suffer a loss this year for the first time.
Neighbouring Croatia and Serbia had faced problems with unreliable clients and unhappy guarantors but then introduced stricter controls of creditors and new protection mechanisms.
"It is very difficult to find a guarantor in Serbia as citizens are heavily indebted and very few can qualify as a viable guarantor," a clerk in a Belgrade bank told Reuters.
In Bosnia, where the war claimed about 100,000 lives and property suffered heavy destruction, people had to rely on each other. A guarantor had been the safest instrument until the crisis.
The microcredit sector, set up and funded by the World Bank and other international donors after the 1992-1995 war between the Bosnian Serbs, Muslims and Croats, has been praised as a success in reviving small businesses in the war-torn country.
Such small loans have helped create more than 100,000 jobs so far, enabling many to open businesses such as souvenir shops, restaurants, food production facilities, farms and wood processing workshops.
The global economic downturn has taken a hefty toll on these small businesses.
"Our clients are excessively indebted and any disturbance of liquidity on the market has a direct impact on them," said Seselj, who is deputy director of Sunrise which extends loans to small businesses.
The microcredit sector had seen strong growth in recent years of as much as 40-50 percent in some organizations, but it will post a loss of up to 4 percent in the first half of 2009 for the first time since it was established because of the economic downturn, Seselj said.
The default rate has doubled to 8 or 9 percent of all such loans since the end of 2008, he added.
The Bosnian economy, which recorded solid growth of 5.5 percent in 2008 and 6 percent in 2007, is forecast to contract by 3 percent this year, according to estimates by the International Monetary Fund (IMF) and the Bosnian central bank.
"It's very difficult, we certainly feel the impact of the crisis on our customers but we must try to survive," said Munira Babic, a Sunrise client anxiously awaiting customers in her souvenir shop in Sarajevo's historic Turkish quarter.
In the two autonomous regions that make up Bosnia, microcredit loans range from up to 5,000 euros in the Muslim-Croat federation to 25,000 euros in the Serb Republic.
Many people piled up several loans as microcredit organizations were not obliged to report on their clients to the central credit registry until several months ago.
Only the borrowers knew how deep in debt they really were. On top of their own borrowing, many microcredit clients were guarantors to each other and finally got caught in a circle of indebtedness.
In the Serb Republic, where some have even committed suicide because they could not pay off loans, a new association seeks changes in legislation to protect guarantors.
"The main problem is the lack of regulation on forced debt collection," said Zeljka Rakocija, deputy head of the Serb Republic banking agency which supervises banks.
"Banks are choosing the easiest way and immediately target a guarantor instead of going through lengthy court procedures," Rakocija said. "And when there is no regulation, the door is automatically opened to fraud."
Some do not wait for the courts.
"Sometimes you have to use force to get back your money," said Sarajevo bar owner Medo Corovic, who confiscated shop inventory of a friend whose credit he had to pay. "Bankruptcy I can understand, but shamelessness I don't accept."
Additional reporting by Igor Ilic in Zagreb, Ivana Sekularac in Belgrade and Benet Koleka in Tirana; Editing by Adam Tanner and Megan Goldin