Georgian Micro-Finances Outrun Banks
23 August, 2012
Georgian Micro-Finances Outrun Banks

eorgian micro-finance sector flourishes as banks yield positions. The entire sector assets almost doubled since 2010 while banking sector grew only by 20%. Weaker banking sector means weaker economy - sector pundits worry and appeal to regulatory body to implement more in-depth reforms in banking sector.

According to the Association of Young Financers and Businessmen (AFBA), Georgian micro-finance sector is growing fast since 2010 that bespeaks of limited credit access at banks which impels potential banking clients to go to micro-finance

organizations. Based on official statistics, the entre assets of micro-finance organizations grew by GEL 200 million in the first quarter of 2012 compared to 2010 and made GEL 474 million totally. The figure translates into 180% growth in 2 years. Its credit portfolio more than doubled in the reported period as it increased by 212% from GEL 180 million in 2010 to GEL 382 million by first quarter data of 2012. The sector’s rapid growth is largely defined by high interest rates that by 7-fold exceeds the European rates.

According to AFBA research, the average yield at Georgian micro-finance sector makes 37% [31.9% on business loans, 28.9% - on consumer loans, 58.7% on auto loans, 34.8% on mortgage, 40.1%   - pawnshop loans and 29.8% - on agriculture credits] while the average interest rates stands at 5% in Europe. At a glimpse this kind of growth can be assessed as the success of micro-finance sector but AFBA experts believe micro-finances took advantage out of banking crisis of 2008 and questioned the moral sides of such success.

As a matter of fact, Georgian banks faced losses of GEL 215 million and GEL 65 million in 2008 and 2009 respectively as a result of double impact of global financial crisis and the short-lived war with Russia in 2008. Commensurately there emerged a large group of black-listed bank clientele to whom banks. doors were shut for a long time and who had no way-out to solve their financial problems other than taking loans at micro-finances. They queued toward the less regulated micro-finances able to disburse credits at “milder” lending terms but for higher yield. This milder regulation coupled with the underdeveloped financial market also did their tribute to micro-finance sector success.

According to Georgian regulation, micro-finances unlike banks can stretch loan-taking period over years while banks are obliged to reflect the disbursed loans in next month balance sheet immediately. Micro-finances can allow themselves not to require collaterals to back-up credits and therefore eagerly disburse loans to riskier clients shunned by banks.  But the “easy” terms cannot offset the bondage interest rates. However insolvent borrowers who need new loans to clear banking loans generally had no other way than accept this single option for the underdeveloped financial market offers no alternative funding ways unlike the best word practice that provides with multiple financial instruments.

To AFBA experts the doubled credit portfolio of micro-finances shows the alarming trend that the bigger and bigger part of society has problems with banks.

Success of micro-finance sector makes Lia Eliava, a financial analyst to think that banks fail to implement their function of crediting the economy. She believes the problem trails down to high profit margin of banks. The cumulative yield on credits averages 24.2% on banking loans that is one of the most expensive worldwide. According to the World Bank’s data, only seven countries fix interest rates higher than Georgia.

On the other hand, banks are the channel where micro-finance sector gets money in fact. And as banks fix high rates micro-finances add their profit margin thus blowing the yield burden up.

“The point is that banks  prefer to disburse credits to micro-finances that are more guaranteed to pay off loans rather than credit businesses, especially smaller entrepreneurs, as far as crediting of the economy includes higher risks. And the business goes to micro-finance sector. This is the reason micro-finance sector enhances on expense of banks in fact,” Eliava elaborated to Georgian Journal.

She fears that as banks yield their positions to micro-finances it may lead to economic stagnation for banks are the key financial channel to economy crediting and its drive force and micro-finance sector cannot supplant their function. Only banks can disburse large credits while the cap credit line available at micro-finances crosses GEL 50 thousand limit line. Bank is the mechanism that provides state with large resources and it is the only institution allowed to attract deposits.  “Therefore it is of crucial importance that banks restore the function of crediting the economy and one of the effective tools for that is cutting down interest rates,” Eliava said. She believes Georgian central bank is responsible for solving this issue properly.

“It should carry out more in-depth reforms in the sector to make credits more available rather than apply just cosmetic remedies like disbursing huge amounts of refinancing loans to banks to keep them floating [artificially] while certain banks obviously face bankruptcy problems,” she stated.

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