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Competition on Banking Market Shrinks Year to Year

The banking sector is the key and biggest segment in Georgian economy. Despite commercial banks are considered as locomotives of the state economy, criticism against crediting institutions has been growing over the past years.

Georgian citizens express complaint in many directions, including against expensive credits, high commission fees and fines, enslaving contract conditions and so on. For example, credit or deposit agreements of commercial banks include clauses, under which commercial banks are able to unilaterally revise the approved and signed agreements and their conditions any time in any form. This is alarming situation, when all commercial banks have the same attitude to clients. Consequently, consumers have to accept the enslaving conditions offered by crediting institutions. As a result, we have low competition on the banking market. In practice, two major commercial banks dominate in Georgia’s banking sector and they dictate the terms.

In his last Tv interview ex Prime Minister Bidzina Ivanishvili “fought” against the two major commercial banks again. “Two banks have overeaten the whole country. Our citizens cannot get rid of bank debts. In this respect, I would say Bank of Georgia and TBC Bank rank first worldwide in terms of profitability.  Maybe, we should be proud, but at the same time, we see that Georgia is leader in terms of excessive debts. Our citizens pay more than one third of their incomes to serve interest rates of commercial banks and this is shameful”, Ivanishvili said in the Tv program of Georgia Public Broadcaster (GPB).

Public criticism, as a rule, mainly hits two major commercial banks. Today, the Georgian banking sector registers 16 commercial banks and the most part of them hold an insignificant market ratio. There were times with more than 20 commercial banks in Georgia. However, over the past years the amalgamation process continues. For example, over the past two years TBC Bank bought Bank Republic and Constanta and the crediting portfolio of Progress Bank. Meanwhile, in the mentioned period Bank of Georgia absorbed Privatbank and bought micro and small loans portfolio from ProCredit Bank. Bank of Georgia assets rose to 12.6 billion GEL from 9 billion GEL over the past 3 years. As to TBC Bank, its assets increased to 12.9 billion GEL from 6.9 billion GEL, that is the figure has doubled over the past 3 years. As a result, starting 2015, the market ratio of the two biggest commercial banks in total assets rose to 73% from 54%, that is the growth constituted about 20%. As to profits, the ratio of these two commercial banks in total banking sector’s profits exceeds 80%.

When determining the competition level on the banking market, the market concentration is appraised, that is, the ratio of system banks in total assets. For example, in Georgia the market concertation is much higher than in central and eastern European countries. For comparison, the banking service market of Georgia is more concentrated than in Great Britain  (CR5 = 33%, HSBC Holdings, Barclays, Lloyds Banking Group, Standard Chartered, Nationwide Building Society), France (CR5=40%, Credit Agricole, BNP Paribas, Societe Generale, Groupe BPCE, Credit Mutuel), Italy (CR5=27%, Intesa Sanpaolo, UBI Banca, Banco Popolare, Mediobanca), Germany (CR5=22%, Deutsche Bank, Commerzbank, DZ Bank, Landesbank Berlin Wurttemberg (LBBW), Bayerische Landesbank, Norddeutsche Landesbank (Nord LB), Helaba Bank, Hypo Real Estate Holding, WGZ Bank). As noted above, the ratio of two major commercial banks in Georgia accounts for 75%, while jointly with the third bank – Liberty Bank, this ratio exceeds 80% in case of these three system commercial banks.

Low competition level on the banking market generates a number of problems. Namely, over the past years, profits of commercial banks have been growing in record figures on annual basis. Public discontent also grows. According to National Bank of Georgia (NBG), in 2017 net profits of Georgia-based commercial banks (profits after profits tax) constituted 870 million GEL, that is, a doubled figure compared to 2014 ( 475 million GEL). It is interesting that if we compare the Georgian economy growth paces to the banking sector’s growth paces in 2013-2017 , the banking sector’s annual growth pace exceeds the state economy growth at least 6 times.

The practice shows that the competition level is low, when the central bank does not take active steps for ensuring healthy processes. Over the past years, NBG-taken steps for protection of the clients’ rights should be appraised as positive, but they are not sufficient and the banking sector supervision policy requires revision. We hope the central bank of Georgia will follow recommendations by International Monetary Fund (IMF) and other international organizations and take efficient steps for ensuring competition on the banking market.

By Merab Janiashvili
Economic Analyst
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