CASHFLOW ROUNDABOUT

Three years ago, when I moved to Bulgaria, I was lulled into a false sense of comfort by the number of international banks here. If nothing else in the country worked, at least simple monetary transactions would be possible. How wrong I was!

There was no Internet or telebanking, no credit facilities, few if any foreign mortgages and domestic lending was at a bare minimum. Telegraphic transfers, IMO's and bank drafts were virtually unheard of. Internal computer systems were outmoded making it impossible to get a basic statement without having to wait several days. A simple cash withdrawal required the skills of a graduate linguist and the patience of Job. Moreover, if you were making a large withdrawal, a minimum of two days notice was necessary, presumably so that the bank could search its vaults for every 10 leva note they could find. The protocol surrounding a large withdrawal was something akin to a spy movie. You arrived at the bank at an appointed time armed with a carrier bag. Burly security guards locked the doors to the banking hall behind you, whilst the cashier spent the next half hour counting out your money in denominations of 10 and 20 leva notes. You then waited for the branch manager to finish his lunch/game of cards/ call to his wife before the cashier was able to pass the money through the pigeonhole and finally that's where the carrier bag came in. The denominations were so small that you needed a bag to carry your cash. Once the transaction was complete, you were free to walk the streets secure in the knowledge that your wad of notes was safe within your supermarket carrier.

Why would anyone conduct a large transaction in cash as opposed to using internationally renowned methods like money orders or bank transfers? The answer was simple – Bulgarian's did not trust these “new-fangled” methods. Something I found hard to relate to until I witnessed it at first hand: a Bulgarian friend of mine broke all traditional barriers to doing business when he sold his car on the renowned auction site eBay. The buyer, who lived in Spain, immediately sent an international money order drawn on a Spanish bank.

It was all perfectly legal, but the Bulgarian friend had no idea what he had received, despite the fact that he was a manager within one of the international banks. He called me into the bank to shed some light on the mysterious “bit of paper”, whilst his boss and colleagues gathered round clueless. Sadly, my explanation was not enough to satisfy him that this indeed was a satisfactory term of payment and in the end he posted the cheque back and asked for cash.

Pre Bulgaria, a credit card transaction was tantamount to paying cash, indeed, it was better because your purse was not overrun by tatty notes and coins and you were protected should a transaction go wrong. The process of shopping became an even greater joy when the UK introduced chip and pin readers in every store including the corner shop. I was totally unprepared for the derision attracted by a simple credit card here and the one time I found a retailer who was willing to accept my card, I was forced to produce my passport, which was heavily scrutinised before the transaction took place.

Thankfully, Bulgaria's banking system has come a long way in the last three years. The hole in the wall is no longer a machine for foreign tourists to use on holiday, credit cards are welcomed in all national chains and keeping tabs on your finances is now child's play. The banking system is waking up to the needs of all of its customers by offering Internet and telebanking, IMO's, an array of plastic and a wide selection of loans.

The only difference between the Bulgarian system and that of the UK now is that you have to ask, hassle even, to get the service you require. In the UK, the opening of an account leads to an immediate introduction to wide ranging banking services, the invitation to take out a loan or mortgage and the insistence that life without a portfolio of insurance policies is not worth living.

The UK system is geared around “selling” the customer everything he may need: in reality, the bank actively encourages its customers to take out credit, whereas in Bulgaria, you have to read the literature on display in the bank and make up your own mind. What effect have the dramatic changes in banking had on the indigenous population? There has been a monetary revolution here that has gone largely unnoticed and unchallenged. Today, more Bulgarians are taking advantage of the new mortgage liberalisation laws.

Bulgaria, like the UK, has one of the highest percentages of private home ownership because property has been passed down through generations, yet the thought of selling up and moving somewhere new or of spending precious leva on renovating an existing residence was an alien concept until recently. Bulgarian banks now offer attractive mortgages and credit facilities.

In the first five months of 2007 demand for consumer credit increased by 22 percent compared to figures for the same period in 2006. Home improvement loans focusing on repairs and energy efficiency improvements now make up the largest part of Bulgarian lending. In 2006, the take-up rate on mortgage loans doubled, however growth of 110 percent is expected during 2008 / 09. At the end of 2006, the mortgage market was worth 1.8 billion euros, but by 2009 it is expected to reach 3.8 billion.

Currently mortgage loans make up 36 percent of the total loan market, but this figure is expected to increase to around 45 percent by 2010. Over the next two to three years interest rates are likely to fall and may reach EU loan rates, which would make mortgages much more affordable. Decreases in interest rates are likely to come in the form of promotional packages offered by the larger banks. In 2007 Piraeus Bank launched easy-term mortgages and lower interest rates on consumer loans and overdrafts for Bulgarian military personnel after having agreed on a framework for the scheme with the government. The loans have no set limit and have repayment terms of up to 35 years. And it doesn't stop there.

The Bulgarian credit revolution is gathering pace with people borrowing higher amounts of money: in 2006, 15 percent of all loans were in excess of 100,000 leva; in 2007, this figure was already exceeded by February. The average loan value in 2006 was 26,000 euros; by March 2007 it had increased by 20 percent to 31,000 euros and is still gathering momentum.More Bulgarian banks now offer property services in order to push their mortgage products.

The idea is to guide clients through the once bureaucratic maze of home ownership, whilst making borrowing easier and more acceptable. Currently there are close to 120 different mortgage loans on offer on the market. CreditCenter expects that by the end of this year this number will increase to at least 250.

Is this a good thing for Bulgaria? That's a matter of opinion. Used wisely credit is a good thing, and easy access to mortgages can stimulate the housing market. Nevertheless, coming from a country where people are actively encouraged to rack up large debts, I would suggest Bulgaria proceeds with caution.