Boosting Georgian leasing
24 March, 2011
Boosting Georgian leasing

Georgia shapes a new leasing legislation to give an impetus to the development of leasing as well as Georgian industry

To boost the development of Georgian economy, particularly smaller business, Georgian government decided to give an impetus to the underdeveloped leasing sector in the country and came up with the initiative in last February to create a new consummate legislation in 2-3 months, regulating  leasing in Georgia. Association of Georgian Leasing Companies in cooperation with the National Bank of Georgia,

as well as the ministriy of finances , has already worked out a draft version of a new legislation project that is supposed to be elaborated and approved soon. 
Leasing is an alternative means to banks and the most apt remedy to uphold the SME development, which play a significant role in the growth of the national economy at it as the SME representatives are the most active taxpayers. It doesn’t require additional collateral, the maturity matches the equipment usage, it is flexible, documentation is simpler and it is user-friendly, experts say.
“Leasing is one of the most popular means to industry development globe over as large  reduces financing risks, regulates and cuts down prices on technological equipments as well as provides with wider range of choice than banks do as banks are majoring on profiles of industry, they have more in-depth knowledge in sector-economy and wider contacts with equipment and technique producing companies. They act as a mediator between entrepreneurs and machinery producing companies and ease life to both as they help producer to sell its product and entrepreneurs to procure due machinery under reasonable terms,” Shota Murghulia, an economic analyst with the Center for Economic Problems Research (CEPR), explained to Georgian Journal.
According to him, leasing is more important to country with low purchase power like Georgia for it is essential to agriculture and industry development.
However leasing is an underdeveloped sector in Georgia unlike banks that play the first fiddle in the country’s financial market. But banks usually snub smaller companies and the larger the company the bigger the credit access chance. Although banks still provide with cheaper than leasing product for the latter is underdeveloped due to taxation and legislation defects.
Three Georgian leasing companies [including TBC Leasing [owned by TBC Bank], Georgian Leasing Company owned by Bank of Georgia, and one independent AG Leasing] have been operating at Georgian market starting 2003 and their number did no increase up to day.
According to Nana Mikashavidze, Head of TBC Leasing as well as presiding Association of Georgian Leasing Companies, inclement taxation regime that did not envisage specific of leasing sector coupled with controversial legislation [that leaves bigger risks with leasing company compared to its client for example it empowers a client to cease contract with leasing company any time] were two key factors creating setbacks to Georgian leasing sector.
“There are about 14 leasing companies operating in Slovenia that has twice less population than Georgia, and 10 out of it are international companies, 34% of small and medium business in Europe uses leasing in fact  while we have only three companies,” Mikashavidze told Georgian Journal. “The sector was somewhat developing till 2007 and total leasing portfolio increased from USD 15 million in 2004 to USD 30 million in 2007, and a couple of foreign companies were interested to enter Georgian market but they changed their mind due to unfavorable taxation system.”
Unconsummated legislation was the key factor that Georgian leasing sector could not resist the blow of financial crisis in 2008 for poorly developed risk management, number of bad credits increased to 30% of total leasing portfolio, the portfolio figure dropped to USD 15 million again  and the sector cannot get recovered from the crisis shock as of yet.
“We cannot get back our bad credits because most part of our clients went bankrupt, they are just insolvent and unlike banks we lack proper execution tools to raise our finances, we need more specific approach in regulation,” Mikashavidze said.
Now when even the international leasing legislation was re-written in 2008 and Georgian government made agriculture and manufacturing development as priorities works on streamlining Georgian legislation with the international law are undertaken. Georgian government even enables leasing sector to correct taxation regime that charges by property tax both leasing company and its client alike, it does not envisage amortization factor when calculating tax charge, also imposes Value Add Tax  on leasing product that  makes leasing product more expensive and uncompetitive than banking product. 
Mikashavidze hopes that the new legislation that is already tailored on international law will remove discomforting factors and attract foreign investments in leasing sector as well as increase demand on leasing thus cutting down price on this product. 
Davit Narmania, Director Executive of CEPR, thinks one of the key factors why leasing is underdeveloped in Georgia is lack of demand.
“It is tourism and hotel infrastructure that develops in Georgia mainly and they need not leasing, leasing is attractive to manufacturing and processing industry that is not developed in Georgia and commensurately there is insignificant demand on leasing,” he said.
Mikashavidze counters that there is a big demand in fact but interest is low for awareness is low in society. Initiators of leasing reforms plan to increase awareness after the legislation problem is settled.

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