Micro-finance organizations have ravenous appetite in Georgia
03 April, 2014
Micro-finance organizations have ravenous appetite in Georgia
Georgian micro-finance organizations charge consumers the highest rates across Europe, thus leading clientele to impoverishment, Association of Young Financiers and Businessmen claim based on their recent study. The AFBA requires a stronger regulation on this end. Micro-financing is one of the fastest growing sectors of Georgian economy and grew 260 times on the assets side between 2006 and 2013. The net loan portfolio grew 256 times and the net profit by 50%. According to the latest statistics of the National
Bank of Georgia, the total loan portfolio of the sector accounted for GEL 661 million while 98.5% of the portfolio, GEL 602 million is disbursed on individuals and only 1% or 3.6 million is given to companies.
Georgian micro-financing looks attractive for investors because the coefficient of Return on Assets is seven-fold higher compared to the banking sector: 7.1 to 1. The coefficient of Return on Equity is almost five times higher standing at 28.2% to 5.8%. AFBA researchers believe the high profit margin comes from similarly high interest rates that look like the highest in Europe. NBG does not run any precise statistics on the micro-finance sector because the sector is hardly regulated. The AFBA tried to calculate the average interest rate through the researching 30 micro-finance organizations. The research revealed that the benchmark rate on mortgages starts from 30% and goes as high as 60%, while the rates on business, consumer, car and pawn loans average 31-32%, 28-30%, 58-60% and 36-40% respectively.
“These rates look almost astronomic compared to the rates practiced in Europe as the European Central Bank official statistics show,” Nodar Chichinadze, Head of AFBA, told Georgian Journal. According to the data of July 2013 of the ECB, average rates vary from 1.18% to 9%. The lowest rate (1.18%) is available in Finland and the highest (9%) in Romania, whereas for instance Estonia charges only 2.65%, Hungary - 7%, Latvia and Lithuania - 2.71% and 3.15 respectively, and Poland - 4.9%.
“We are alarmed about the Georgian statistics for such high interest rates, which will lead the population to impoverishment. Just imagine the solvency power of a borrower who must pay 30-60%,” Chichinadze stated. According to AFBA research, the essence of the problem is the loose control on the micro-finance sector that allows the sector to disburse mortgage loans without proper checking whether or not the borrower can pay it back. The key guarantee is real estate which backs up the loan and which passes on the micro-finance organization if the client becomes insolvent. The sector takes advantage of the illiteracy of the Georgian consumer regarding financial and banking products and the heavy social needs that push potential clients to take the loans under bondage terms because no bank will give money to financially insecure borrowers. As a result hundreds lost their homes and ended up being evicted in the last few years.
Therefore, the AFBA calls for stronger control on the micro-finance sector that tailors the loan contracts to their own interests, and thus passing the risk of burden completely on the consumer.
Giorgi Abashishvili, an economic analyst, believes the high interest rate problem must be solved not by a stronger regulation but by a higher competition.
Lia Eliava, a financial market analyst, believes that the concept of microfinance organizations is distorted in Georgia because they disburse mortgage loans while this is forbidden in the developed world. Therefore, the Georgian microfinance sector does not implement its key function – to finance start-up businesses and Small and Medium Enterprises (SME). Eliava thinks the adoption of GEL 15,000 as a cap limit on loans [in line with the UN methodology] for the micro-finance sector can solve the problem.
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