IJERD – International Journal of Environmental and Rural Development (2014) 5-2

Research article
erd

Rural Livelihood Diversification in South-Eastern Bosnia:
Influence of Household Financial Management
SINISA BERJAN*
University of East Sarajevo, East Sarajevo, Bosnia and Herzegovina
Email: sinisaberjan@yahoo.com

MIOMIR JOVANOVIC
Biotechnical Faculty, University of Montenegro, Podgorica, Montenegro

VESNA MRDALJ
Faculty of Agriculture, University of Banja Luka, Banja Luka, Bosnia and Herzegovina

MIODRAG PASPALJ
Belgrade Business School-Higher Education Institution of Applied Studies, Belgrade, Serbia

FILIP MATOVIC
Belgrade Business School-Higher Education Institution of Applied Studies, Belgrade, Serbia

NOUREDDIN DRIOUECH
Mediterranean Agronomic Institute of Bari (CIHEAM-MAIB), Valenzano, Bari, Italy

HAMID EL BILALI
Mediterranean Agronomic Institute of Bari (CIHEAM-MAIB), Valenzano, Bari, Italy

AZIZ ABOUABDILLAH
National School of Agriculture, Meknès, Morocco
Received 19 November 2013

Accepted 1 March 2014(*Corresponding Author)

Abstract A growing body of evidence shows that agriculture is no more sufficient toensure sustainable rural development in Bosnia and Herzegovina (BiH) therefore rural
livelihoods diversification is crucial. Farm activity diversification issue can be considered
in terms of resources (land, labor or capital), location (on-farm or off-farm) and output(farm or non-farm). Well-developed financial systems are associated with more rapid andinclusive rural development and foster rural economy diversification. The paper aims atanalyzing rural livelihoods diversification in south-eastern BiH with a particular focus on
the influence of household financial management. The paper is based on an extended
literature review and a questionnaire survey performed in March 2013 with 147 randomly
selected rural households from nine municipalities in south-eastern BiH. The majority ofthe surveyed rural households (68.7%) have mixed (farm and non-farm) livelihoods.
Household sources of income are quite diversified and many rural households havedifferent non-farm income sources. More than two-fifths of the surveyed households had
an activity on development or started new non-farm businesses in the last five years.
However, about a half of these gave up because of many problems such as the lack offinancial resources and time. Weak business skills are also a limiting factor. Financial
literacy is often lower in rural areas. Moreover, it is positively associated to educationlevel and negatively correlated to age. It comes no surprise that well educated and young
rural people are those who started more new diversification businesses during the last five
years. They find it less difficult to deal with paperwork, bureaucratic procedures andadministrative documentation needed to make request for loans. Effective household
financial management, depending mainly on household head financial skills, plays asignificant role in determining livelihoods strategies and diversification endeavors success.
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IJERD – International Journal of Environmental and Rural Development (2014) 5-2

Keywords rural finance, household financial management, livelihood diversification,
BosniaINTRODUCTION
Agriculture is no more sufficient to ensure the sustainable development of rural areas that’s why
rural economy should be diversified (Antonelli et al., 2009; Haggblade et al., 2007; OECD, 2006).
The framework provided by OECD (2009) considers the issue of farm household diversification bydifferentiating between activities in terms of resources (factors of production: land, labor or
capital), location (on-farm or off-farm) and output (agricultural or non-agricultural). The majordifferentiation between activities is made on the basis of the location of the activities, either onfarm or off-farm. Within each location, diversification activities are further differentiated as to thetype of output, whether agricultural production or continuation (e.g. processing of food orproviding contracting services).
Rural dwellers involved in activities related to economic diversification have different
investment needs. Generally speaking investment needs can be categorized as follows (FAOROECA, 2012): investment in new technologies (e.g. equipment, storage facilities); investment in
new tourism facilities (e.g. restaurants and accommodation facilities in order to meet European
Union’s standards); investment in marketing (e.g. marketing materials, websites and marketingstrategies). Therefore, they use often loans and have different needs in terms of financial services.
One cause of poverty is the lack of access to credit, especially among rural households(Coleman and Wynne-Williams, 2006). A growing evidence body shows that well-developed andinclusive financial systems are associated with more rapid growth and better income distribution.
Finance helps extend the range of individuals, households, and firms that can get a foothold in themodern economy (Basu, 2006). According to Richter (2011), rural finance is the provision offinancial services in rural areas that support a wide range of economic activities and households ofvarious income levels. Rural communities could make use of a wide range of financial services likesavings, money transfer services, insurance products, loans, leasing, factoring, loan guarantees,
venture capital, and investment funds.
Budgets for agriculture and rural development of the Bosnian Entities - Republika Srpska (RS)and Federation of Bosnia and Herzegovina (FBiH) - remain low. Subsidies to farmers are mainly
product-based. The lack of an efficient administration and effective rural credit schemes hamper
the efforts to increase the productivity and competitiveness of the sector (EC, 2012).
The paper aims at analyzing the influence of household financial management on rural
livelihoods diversification in south-eastern Bosnia and Herzegovina (BiH).
METHODOLOGY
The paper is based on secondary data from an extended literature review and primary data collectedby a questionnaire survey carried out in March 2013 with randomly selected 147 rural households
in nine municipalities of south-eastern Bosnia: Vlasenica, Han Pijesak, Milici, Zvornik, Rogatica,
Pale, Bratunac, Sokolac and Foca.
The questionnaire dealt with different issues including:- General information about the interviewees: age; gender; role in household (head or member).
- Household characteristics: type of household (agricultural, non-agricultural, mixed); number ofmale and female members; age structure; level of education of household members.
- Household livelihood diversification: household sources of income; main occupations ofhousehold members; sources of household primary income; significance of income fromagriculture (main income, additional income, no income from agriculture); attempts to start new
non-agricultural businesses to improve household financial situation; kinds of businesses tried out;
main problems and constraints faced.
- Financial management of rural households: household financial manager’s age, gender,
educational level and occupation; membership in saving/credit groups.
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IJERD – International Journal of Environmental and Rural Development (2014) 5-2

The average age of the interviewees was 47.4 (minimum: 19; maximum: 70). The majority of
the respondents were males (91.2%). Almost all the interviewees were rural households’ heads(89.2%). Nevertheless, 15 respondents were not but they deal with financial management in theirhouseholds so they were entitled to answer the questions. Regarding household structure, thenumber of household members ranges from one to 14. As for education level, 4.7% of household
members are illiterate while the rest have different education levels (primary school: 26.9%,
secondary school: 17.7%, high school: 37.6%, and high education diploma: 13.1%).
RESULTS AND DISCUSSION
Livelihood Diversification Strategies
The majority of the households considered in the present field survey (68.7%) were mixed
households that’s to say that their livelihoods are based on both farm and non-farm incomegenerating activities. Meanwhile, 6.8% of the target households consider themselves as nonagricultural.
Household livelihood strategies are quite diversified and many rural households have different
farm and non-farm income sources. Nevertheless, the most important sources of income are crop
production and animal husbandry, pensions, salaried work and wage labor (Table 1).
Table 1 Sources of income of rural households
Source of income
Crop and animal production
Pensions
Salaried work
Wage labor
Services provision
Forestry

%*
62.6
36.7
34.7
26.5
16.3
8.8

Source of income
Non-farm self-employment or businesses
Handicraft
Trade
Land and property renting
Social aid and assistanceIndustry

%*
5.4
4.8
2.7
1.4
0.7
0.7

*Multiple answers were possible.
Source: Authors’ elaboration based on the field survey results.

Despite the fact that about two-thirds of the surveyed rural households deal with agriculture(crop production and animal husbandry) the percentage of households whose primary income
source is outside of agriculture is quite high. In fact, about a third of the target households (33.2%)
declared that income from self-employment or business ownership is their primary income source.
Other important primary income sources are salaried work (48.2%) and income from wage labor(18.6%). However, it should be highlighted that salaried work, and to a certain extent, also wage
labor, includes also agriculture-related activities. In fact, income from agriculture is the mainincome for 24.5% of the surveyed households and additional income for 63.3% of them.
More than two-fifths of the surveyed households (40.8%) had an activity on development or
started new non-farm and off-farm businesses and activities in the last five years to improve theirfinancial situation and livelihoods. Of these, only about a half (51.7%) still deal with the non-farmactivities that they have started up. The main off-farm and non-farm activities that the surveyed
rural households tried out during the last years are handicraft (23.3%) and trade (23.3%). Other
developed income-generating activities include: food processing, transport, rural tourism, timberand non-timber forest products collection, services provision (equipment and machines), teaching
and wood processing.
Effect of Access to Credit and Household Financial Management on Livelihood
Diversification
About a half of the surveyed rural households in south-eastern Bosnia that invested in new
diversification activities gave up because of many problems especially lack and/or difficult accessⒸ ISERD

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to funding and loans and lack of time to deal with new activities. According to FAO-ROECA(2012), the barriers to starting additional income generating activities in Bosnia are mostly
economic. The lack of funding and access to credit is the barrier that most frequently mentioned by
Bosnian farmers. Rural dwellers and enterprises are not seen as attractive customers and banks do
not have enough experience of the risks surrounding diversification activities and so are unable toevaluate business plans and credit requests. This makes interest rates very high. The conditions are
better for microloans; that is, the interest rates are lower.
One reason for which some loans requests were rejected was age of applicants. The age of thesurveyed households’ financial managers ranges from 22 to 71 (average: 48.1 years). Females
represent just 8.8% of the household financial managers. According to FAO-ROECA (2012),
women and young people in BiH face difficulties in getting loans since they are rarely the ownersof the land or assets on which they want to make investments.
Another important loans rejection reason is also the lack of collaterals. Many Bosnian
mentioned lack of access to financing (including savings) as the main obstacle to livelihood
diversification. Farmers mention mortgages and having to find guarantors as other obstacles (FAOROECA, 2012).
Nevertheless, many rural households’ heads do not even apply for loans because theapplication procedure is too complicated for them. This is true not only regarding loans but also forother administrative procedures (e.g. for getting subsidies). Another rejection reason is thepresentation of bad quality business plans. This also explains why many diversification endeavors
are hampered by the lack of market since most rural people do not carry any feasibility study. All
showed the importance of the human capital of the household financial manager.
Only 7.5% of the interviewed household financial managers have high education diploma,
most of them have secondary school levels while 12.9% stopped their education at primary school.
Only a very small percentage of the financial managers (2.1%) are illiterate. Regarding theoccupation of household financial managers, 23.8% are government employees, 25.9% are retired,
15.6% are self-employed, and 11.6% are private company employees. Others are unemployed andhousekeepers.
Many factors influence the diversification of farm households into non-farm activities,
including government intervention (OECD, 2009). Prerequisites for encouraging private
investments include improving the business climate, and providing business development andfinancial services suited to the needs of small rural entrepreneurs. Acquiring a labor force withappropriate skills is crucial. Strengthening the rural people’s capabilities to take advantage ofopportunities in the rural non-farm economy is essential. Education and skills are particularly
important (IFAD, 2010).
According to the Working Group on Diversification of the British Department forEnvironment, Food and Rural Affairs (DEFRA, 2007), key barriers to farm diversification include
validity of market research, capacity to develop a considered business case, quality of businessskills and training, availability of appropriately skilled personnel and regulatory controls, andaccess to specialist business advice. Access to finance was also identified as a potential barrier.
According to Richter (2011), in general, levels of financial literacy are often low in rural areas
so it is important to promote a finance culture among rural populations through awarenesscampaigns, financial education trainings or experience/testimony-sharing.
Diversification endeavors success is influenced by financial literacy. Control of financial
resources can improve good management practices. By learning how to manage their enterprises
better, women, as well as men, can become more capable of controlling their economic activities
and thereby better able to evaluate their resources (Sudan, 2007).
Rural people tend to operate not just with one but with several livelihood activities. They often
switch from one to the other even within the same day and also by seasons. Diversification makes
even more complicated financial management as households with mixed livelihoods should
manage variable cash flows and match income and expenditure requirements by saving andborrowing from different sources (CARE India & FAO, 2007).
Lack of experience is another problem that was faced by many Bosnian rural households that
tried to diversify their livelihoods. In fact, many rural Bosnian people were forced to start newⒸ ISERD

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businesses for which they had no experience prior to the civil war, or were faced with highcompetition and were selling their products almost at a loss to the food processing factories. They
would have needed skills to start something new that the market needed. Bosnian rural households
are nowadays aware of the fact that also in agriculture it is especially important to follow
technology and to obtain technical assistance so as to be able to develop a business plan, minimizerisks and put aside profit from the business. Education on how to run such businesses is of utmost
importance. Risk in agriculture is always high and one has to gain experience so as to minimize its
impact once it occurs (Matul & Tsilikounas, 2004).
Difficult access to funding is aggravated by the fact that only 12.9% of the surveyed rural
households are members in saving/credit groups such as “Mali akcionari” (small shareholders) and“Mali poljoprivrednik” (small farmers) organizations, microcredit foundation “EKI”, and Mikrofin.
Micro-credit in BiH stimulated household reconstruction as it provided an efficient and long lasting
coping mechanism for households after the war. For most clients micro-credit helped at least to
sustain their household self-employment activities (Matul & Tsilikounas, 2004).
Membership in local financial groups helps developing financial management skills. As Sudan(2007) points out, regular micro-credit clients adopt good management practices more
substantially, in particular with regard to calculating profits on the basis of records. In fact, theclients are more inclined to use costs and earnings records than are non-client group. The clients
appear better able to estimate their sales, expenditure and profits than those in the non-client group.
The main management practices in use are: capacity to keep enterprise money separate from money
for personal expenses and ability to calculate profits based on records and to estimate profits.
Rural households got in touch with saving/credit organizations to get loans but also for saving
purposes. The choice of these groups and organizations is based on many reasons including thatthey trust the members of the group or they are friends with some of them. The other rural
households never applied for joining saving and credit groups or their applications were rejected.
One of the reasons for not applying was that the application procedure is considered quite
complicated especially for those that have low education levels. Moreover, apart from the lack ofcollaterals another reason for rejecting some applications was that they were badly prepared.
Evidence from India shows that credit groups must have sufficient knowledge and skills todeal with the organizational and technical issues related to various aspects of the economic
activities, in addition to relevant management skills. Therefore, training meant for grassroots
organizations must deal with formation and structure of credit groups, their roles andresponsibilities, and account-keeping and financial management (Sudan, 2007).
CONCLUSION
Most of the surveyed rural households in south-eastern BiH have mixed livelihoods as they rely on
both farm and non-farm income-generating activities. More than two-fifths of the surveyed
households started new non-farm businesses and activities such as services provision and on-farmprocessing in the last five years. However, they faced many problems and constraints such as thelack of financial resources. Weak business skills are also a limiting factor. Well educated andyoung rural people are those who started more new diversification businesses during the last years.
They find it less difficult to deal with paperwork to get loans and subsidies. They are also better
informed about availability, terms and conditions of specialized credit lines. Moreover, thefinancial management skills of the borrowers are taken into consideration by lending institutions
when analyzing loan requests. Educated rural people are also more likely to perform somebookkeeping, which is positively valued by financial institutions.
Harnessing farm diversification, especially in the non-farm economic activities, requires
improving the environment, thus strengthening incentives and reducing risks. Fully exploiting rural
economy diversification potential in Bosnia requires also upgrading rural people’s human capital(including financial management skills), strengthening rural social capital and improving access of
the rural population to finance. Access of rural households to financial services is crucial for
creating an enabling environment for fostering Bosnian rural economies diversification. However,Ⓒ ISERD

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that depends not only on the existence of a good institutional and political environment thatharnesses diversification and makes easier access to loans but also on rural people’s financial
management skills. Therefore, future projects and initiatives dealing with livelihood diversification
should also address this issue. This can be done by organizing training sessions about financial
management and bookkeeping for rural people. Moreover, extension services should include
training about soft financial management skills in their activities.
ACKNOWLEDGEMENTS
The questionnaire used in this research is mainly based on a similar one used by Thi Minh Chau Le(Hanoi University, Vietnam), Philippe Lebailly (University of Liege, Belgium), and Nguyen Tuan
Son (Hanoi University) to analyze access to credit of farm households in Hai Duong province,
Vietnam.
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